Change in any sphere of life is inevitable. In the last decade or so, change has been so rapid in the Indian financial industry space – especially that concerning mutual funds and investment advise – that it is scary to watch even from the sidelines. A couple of years ago, PV Subra(money.com) asked a gathering of mutual fund sales guys, how they purchased rail and train tickets for that conference, did they get it online or via an agent? As expected no one got it via an agent and his point about change and choice got instant validation. So less than five years after the introduction of “direct” choice in mutual funds, we now have free direct mutual fund portals sprouting up to capitalize on the Indian mutual fund growth story. The question is, is this change healthy?
Even today scores of Indians believe that investing in mutual funds via their banks or via certain portals or via their sales guy offering door service is “free”. They believe that these agencies are paid commissions from the fund houses. They also believe (or given that impression explicitly or implicitly by these agencies) that the commissions come from “elsewhere” without understanding that when you buy a “regular mutual fund plan”, commissions are removed from your current investment value every day before the NAV is published. The share of such regular plan retail AUM stands at about 75-80% today. Well for those who understand how commissions work, it is quite clear that this is the most profitable way to sell mutual funds.
When direct mutual funds were introduced in Jan 2013, the only way you could buy them was “direct” with the AMC. Then you could buy “direct” plans via the transfer agents – CAMS (& and then Karvy). Then came along a transaction aggregation portal co-owned by the AMCs – MF Utility (MFU). Direct with AMC and MFU have no middlemen explicitly involved and is the cleanest way to buy direct mutual funds. It is clean (& free) because we know that the AMC charges a management fee which is also deducted every day before the NAV is published. CAMS & Karvy will get compensated for their bookkeeping services but other than that, the AMC cannot pay them commissions or compensate them (at the cost of the investor) for selling direct plans.
This is also true for any privately owned direct mutual fund portal. The AMC cannot compensate them in any way at the cost of the investor. Of course, the AMC can share a piece of their profits with these direct portals. However, considering that all these portals run robo-advisory services, it would be plain unethical & illegal (SEBI investment advisor regulations) if they are compensated from the fund houses. Then they may end up pushing “certain” funds more.
But wait. I am getting ahead of myself here. So after direct AMC websites, CAMS and Karvy came the MFU. The MFU opened the floodgates for direct investment portal startups. Today I would estimate at least 15 such direct portals depend on the MFU for transactions. A few like Invezta and Kuvera have also built their own transaction interface.
When these startups first came along, their operating model was nice and comforting to digest. Since they will not get commissions from the funds, they charged investors a flat fee for transactions and a fee for the robo advisory service. This fee was (is) extremely reasonable (already bordering on free!). Merely months after inception, there was a hard-to-digest change. Kuvera removed the fees and started offering the direct fund investing service for free. Now if you search google for free direct mutual funds, you will also see clearfunds, piggy, zerodha (announced yesterday) all offering free investing services. We also have paytm soon to announce a similar free direct fund portal. There is one more big player, I forget.
First of all, this exposes the (Indian) investor’s mindset. They want to get a cake for free, they want to eat it and still have it too. The mutual fund investor today wants convenience offered free. They want to start and stop a mutual fund from their seat with a few clicks. They want to see how much they gained or lost every day (preferably more often!) “in one place”. They want investment advise for free. When some is offered free, people ask “what is the catch?”. They should be asking, “what is the cost?”.
This is of course understandable. “Why pay when I can do it for free?” is a question that is hard to answer! Perhaps we can only counter it with a question: how long can a business offer such a service (which clearly has multiple costs – portal, gateway, server, security etc) for free? These annual expenses will easily run into lakhs for a portal with say, a 1000 investors. How will they earn a profit, pay their employees etc. At least in the case of a regular fund portal, this is clear for those who understand.
As free direct fund portals are on the verge of getting widespread attention, I cannot help but think if this is a case of jumping from the frying pan into the fire for the typical uninitiated common investor. Most people who have tracked their evolution will agree that the business model is sketchy. The common wording in the FAQ seems to be: we will earn by offering other services to our investors (PMS, loans etc). Clearly, there are a lot of suckers out there who will sign up (why else would the portals even bank on that?), but is that enough? What is the real aim of offering free-direct?
Now, I do not want to write something controversial just to gain attention. So I am going to assume that “if you do not pay for the product, you are the product” does not apply. So I am going to assume* that these free portals will use the investor data for internal analytics and product pushing, but will not sell it to third party agencies. For eg. if the portal detects a customer click on a service multiple times, call them or email them with a “special discount”.Such spying is the order of the day. * I could be wrong, but I hope not. In any case, SEBI should explicitly ban such data outsourcing.
I am also going to assume that these direct portals will not receive any kind of compensation from the fund houses. If they do, it would be illegal and hard to hide for long. Direct funds volumes are too low for this to be practical. Anyway, in this day and age it will get out at some point and that would be suicidal for the business. So let us not smell controversy or conspiracy when there is no evidence of one. In, what follows, I am only speculating but will keep it healthy. If you think I am wrong (and I could well be), please feel free to correct.
I have no clue why a small startup would offer their main service for free. Their market share would be small, to begin with, and take quite a while to increase. So even if they wish to offer another service for free, not many of their existing subscribers will “convert”. It with either take years to break-even or the startup will remain a startup (no boost in profits) for a long time.
Offering a service or product for free to gain visibility and conversion is a well-known business tactic and it has worked well for small establishments. Take for example a free SEO plugin called Yoast. I use it and most websites owners running WordPress use it. There are more than a million installs of the free version. Of course, the business model is crystal clear. There is a premium version with extra features. Yoast writes a compelling SEO blog with a large mailing list and often discounts their other services (which are clear and out in the open) like books, courses, site reviews etc. So even for a layman like me, the business model makes a lot of sense. Offer a valuable product free to rope in conversions.
The point I am trying to make: The business model of the startup free direct portals is not clear. For example, Kuvera says:
We generate revenues through B2B services and market data analytics. We will add value added investment products like PMS and AIF strategies in time and for this, we will charge users who wish to avail of these products or services. Financial goal planning and Mutual Fund investing, though, will always remain free for you to use.
PMS and AIF I can understand (anyway there are not available at present). How they make ends meet now is at the very least obscure. What is the relationship between the direct portal and associated data and “B2B services and market data analytics”? They need to make it clear on their website. It is time for SEBI to mandate clarity in this matter on an urgent basis. I am not claiming something is fishy (although it is far from comforting). Only stating that clarity matters.
In the case of bigger players like Zerodha and Paytm, I think offering free direct mutual fund investing service is just a conduit to get business for their other services. If we assume that they are already profitable, spending on a free direct portal makes sense for them if enough investor pays for other services. They already have a huge client base who could advertise it to new investors.
Zerodha claims “We’ll soon be starting our Loan Against Securities (LAS) business and hope to be able to monetize by offering loans to anyone wanting to borrow against equity and mutual fund holdings”. Even if very few people sign up for this, a new Zerodha coin investor has easy access to their demat account service. So this is like entering a small shop only to find out that the back door leads to a huge mall where we can buy anything on sale. So by offering Zerodha coin free (it was practically free even before), it is likely to strengthen its main offering. I think that seems reasonable and fair. A similar argument will also apply to Paytm. In any case, small or big player, SEBI should be pro-active on this and force them to state business models clearly and also sign a declaration that no data in any form will be sold to third parties. We also need investors to be empowered with a “right to be forgotten” rule like in the EU. Mailers and messages should stop forever at the click of a button.
Now, even if we assume that the regular fund market share is decreasing, it is still a good 70% today. The industry is all gung-ho about growth but a single market crash and subsequent sideways movement can change everything. So it is simply too early to assume that mutual fund is the preferred investment vehicle for a young India. Also, the competition in the small direct fund space is quite intense. So given all that, I think it would take years for the expenditure towards “free-direct” to pay back.
And please don’t be naive and talk about direct becoming popular as “financial literacy”. Everything is a business at the end of the day. Btw SEBI, should also stop AMCs from calling their advertisements as “investor education initiative”. Education my foot!
A fee is a natural barrier that separates the buyer from the seller and this barrier must be crossed by either party for mutual gain. This is the simple logic behind a business. When a few players remove that barrier and short-circuit the buyer with the seller, they clearly have an agenda. Is this agenda any nobler than a sales guy claiming my service is free as I get commissions are elsewhere? In my opinion, no. I think nothing good will come to the investor from these direct investor portals. It will only encourage them to clutter up their financial lives with unnecessary products.
If you are an existing subscriber to these direct portals, be careful. Read any an all fine print and revisions to those carefully. Stay away from anything else they offer. If you want to sign up with these free portals, think twice! This “consolidation” and “all in one place” that new investors make a big deal about is overrated. Individual direct logins to the fund houses with transactions entered into a spreadsheet or any free online tracking portal is all that you need. If you want consolidation, you probably need decluttering first!! Let us watch this space from the sidelines. Even that is scary enough.
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