Why distributors prefer selling insurance products over MFs

Experts say the trend is worrying as it could take a toll on the pace of equity flows and also hinder the penetration drive of the Rs 24-trillion MF industry.

Illustration: Uttam Ghosh/Rediff.com

Selling of mutual fund (MF) products is turning less attractive for individual distributors, who play a key role in onboarding first-time MF investors.

According to industry estimates, the number of new Amfi registered number (ARN) for independent financial advisors (IFAs) in the September quarter stood at 2,106, which was 11 per cent lower than in the previous quarter.

Compared to the March quarter, the tally is 36 per cent lower.

Compared to corresponding period last fiscal, so far the MF industry has added 60 per cent lower number of new IFAs in the current financial year.

ARN is a unique code allotted to intermediaries by the Association of Mutual Funds in India (Amfi).

Industry participants say the trend is worrying as it could take a toll on the pace of equity flows and also hinder the penetration drive of the Rs 24-trillion MF industry.

“Apart from facilitating the process of bringing in new investors, IFAs also help in educating clients on the risk-return profile of various MF products,” said a fund manager, requesting anonymity.

“Not just large-sized fund houses, but even mid-sized ones have reduced their commission rates.

"Distributors are finding selling insurance products more feasible due to lower levels of regulatory intervention and high levels of commission rates,” said Srikanth Matrubai, chief executive officer of SriKavi Wealth.

In September last year, the Securities and Exchange Board of India (Sebi) reduced the maximum expense ratio -- which fund houses charge on equity funds -- to 2.25 per cent, from 2.5 per cent.

Similarly, expense ratios were cut for most major categories.

As the new structure was aimed at passing economies of scale to investors, larger-sized fund houses said that they’d be passing on the bulk of the expense cuts onto the distributors.

Practice of upfront commission was also scrapped, which earlier helped new and small independent distributors to absorb initial costs of acquiring clients.

However, experts say that there other factors too could be contributing to the falling number of new IFAs.

“Direct investing has also gained some momentum on the back of digital platforms and fintech companies entering the fray,” said Dhirendra Kumar, chief executive officer of Value Research.

Even as digital platforms have mushroomed in last few years, experts say IFAs would be needed for deepening the penetration of the overall industry.

“The need for a high touch model continues to be relevant, despite the rise of digital, especially in the B15 (beyond top 15 cities) and B30 cities as a large number of first-time investors enter the mutual fund industry,” read the Amfi-BCG Rs 100-trillion vision document for MF industry.

The overall penetration of MF products in India stands at 11 per cent (i.e. share of MF assets as percentage of country’s gross domestic product).

Kumar said that IFAs also play an important role in helping investors hold onto their investments when markets are volatile.

“Besides getting investors to start their investment journey, IFAs play the important role of dissuading investors to sell their investments out of panic, triggered by daily market volatility,” he said.

According to the Amfi-BCG vision document, there are only 230 Amfi registered numbers / million households in beyond the top-15 cities.

Even in top 15 cities, the numbers are not that encouraging. There are just 4,300 ARNs for every million households.

The national average is 437 per million households.