SEBI will soon make it possible for investors (shoppers?!) to buy mutual funds via e-commerce websites. A discussion on the pros and cons of such a move with a poll which I request you to participate in.
Why are they doing it?
One word - costs!
If the cost of acquiring a customer is Rs 1,500, you need a mutual fund portfolio of at least R3 lakh for it to be profitable for the mutual fund—that, in turn, reduces the target market to around 3-4 million households. If acquisition costs can come down to Rs 100, you need a break-even portfolio of Rs 20,000 and can now target 34 million households; at R10, the break-even is Rs 2,000 and the target is 105 million households.
Nandan Nilekani, Head SEBI Committee to suggest ways to reduce mutual fund cost structure. Source: Mutual funds go online
How does it work?
To be frank, the details are not yet clear. However, some observations can be made from what is known in public space, which allows us to discuss pros and cons.
Both regular and direct plans can be purchased via these sites.
Let us imagine how such an online purchase can be made:
- An investor types, "Best mutual funds 2016" in Google.
- E-commerce sites have ad displayed prominently for the above keyword.
- The user clicks on of the ads and is directed to an e-commerce site.
- The site displays a list of 'top' funds using, say CRISIL rankings with a 'buy now' icon next to each fund. The funds are arranged category-wise.
- Now each category is a product for the e-com site. Each AMC offering the product is a seller.
- When the user clicks on the product or on a particular fund, s/he makes a choice.
For direct plans, the arrangement is simple. The e-com site has a tie-up with the AMC. Perhaps the AMC will sacrifice some profit (to the e-com site) for higher purchase volume. This makes it simple as the investor will not pay a processing fee.
Alternatively, a processing fee for online convenience provided is also possible (or both!).
For regular plans, the distributor is the seller. This complicates matters because an AMC will sell only its own funds. A distributor can sell funds from any AMC!
So the investor wanting to buy regular plans will first choose the distributor --> category --> AMC(?) --> fund. Profit sharing can be as mentioned above.
Will such a move benefit distributors at all? The biggest enemy for a distributor is visibility and exposure to the direct plans. This is increasing day by day. SEBI is against distributors offering financial advice. So the writing is on the wall - direct is the future.
The key aspects of e-commerce are convenience and cost. Therefore, investors are likely to choose the direct plans even if they start with regular plans.
So obviously, most distributors are not happy about this move. Few think they can expand with a tie-up with the e-commerce portal. I think that is a long shot.
What about investors? Will they buy/should they buy from e-commerce sites?
I think the e-commerce websites have the money to provide a portal with modern conveniences. They are likely to have an E-KYC feature.
Therefore, for the new mutual fund investor, buying via e-commerce portal could be a good idea, provided their holdings can be accessed via an AMC or MFU account any time they want. I think this should not be a problem.
For existing mutual fund investors, the e-commerce solution may not be appealing.
Will the e-commerce portal allow consolidation of existing portfolios? This will cost them time and money. Even for an AMC funded portal like MFU, this task is proving to be far from straightforward.
Even if they don't, once a purchase is made from the e-com site, it should reflect in my AMC account or MFU account. If it does then perhaps I would like to give it a try. That is the e-com portal can be treated as a place to buy funds, consolidation is done elsewhere.
What about redemptions? Would these portals allow these? A full-fledged account which allows two-way traffic (buying and selling of units) will be necessary.
Robustness: Once in a while, online transactions will fail (can be set right by contacting either Bank or seller). My experience is that e-commerce portals tend to be more robust in this regard than AMC portals (just my experience).
Support: Mutual fund transactions are quite different from the typical things that people buy online. So the support for such transactions requires training. This has to be provided by the AMCs or RTAs. This is a make-or-break aspect of e-com fund purchase. If support is not good enough, social media could effectively spread negative opinions about e-com fund buying.
Will AMCs also provide support? For typically e-com transactions, the dealer does not provide support. In this case, I think AMCs should provide independent support for any e-com transaction
What about costs? Convenience comes at a cost. So if we want this and that, we need to pay a fee - either a flat fee or witness a gradual increase in the expense ratio of direct funds to accommodate these expenses.
While it is prudent to watch developments in this space on the sidelines for a while even after it is up and running, I think it is indeed a good move by SEBI to make mutual fund buying easier. Like all things, this tool will evolve in time, typically for the better.
What are your thoughts on the subject? Will you buy mutual funds from e-commerce websites? Do participate in the poll below.