Direct plan equity fund AUM increasing steadily, should IFAs be worried?

The share of direct plan AUM in equity funds has gone up from Rs. 8,119 crore in March 2014 to Rs. 22,559 crore in December 2014.

The AUM in direct plans of equity funds is seeing a steady increase.

Data provided by CRISIL shows that the AUM of direct plans in equity funds has gone up from Rs. 8,119 crore in March 2014 to Rs. 22,559 crore in December 2014.

Direct plan AUM in equity funds

There could be two reasons for such a sharp increase in direct equity assets. Firstly, the AUM of equity funds has gone up due to mark to market gains (The BSE Sensex shot up 23% in March-December 2014. The total equity AUM of the industry has jumped by 71% from Rs. 1.65 lakh crore in March 2014 to Rs. 2.83 lakh crore in December 2014. The increase is also partly due to fresh inflows in existing funds. The industry has mopped up Rs. 50,384 crore during April-December 2014.

Secondly, the appetite for direct plans seems to have increased among HNIs and corporates, say fund officials. Direct plans of equity funds typically tend to have a lower expense ratio (up to 1%) which is a major draw for HNIs and corporates.

So, should distributors be worried by the increasing AUM of direct plans in equity funds?

"Some institutional money has come in direct plans of equity funds. There is a marginal increase (percentage terms) in direct plan AUM in equity funds. However, the base is small. We have not seen retail money moving to direct plans, especially in the case of equity funds," said Himanshu Vyapak, Deputy CEO, Reliance Mutual Fund.

Fund officials say that majority of direct equity AUM is HNI and corporates and retail investors have not migrated to direct in a big way. Industry experts said that a large portion of retail investors will continue to invest through distributors as they need handholding and advice.

“The process of investing in mutual funds is not easy. Retail investors still don’t understand the complexities of funds, not to mention about direct plans. Investors who have a large sum to invest and are savvy have moved to direct plans. However, I don’t see en masse migration to direct plans in equity funds. Retail investors will not go out of their way to invest in direct plans to save just 0.50% as long they find value in distributor’s service,” says Sudhakar Ramasubramanian, Managing Director, Aditya Birla Money.

Experts say that the direct plan AUM in equity funds looks inflated because UTI (which has Rs. 9,366 crore direct equity AAUM) has migrated its orphaned ARN AUM in direct plans. In a clarification sent to Cafemutual earlier, UTI said “Under equity category, UTI MF’s direct plan AUM as % of Total AUM constitutes to 0.27%. The data which is shown under direct plan AUM on UTI website also includes data which pertains to historical AUM of invalid ARNs and wrong ARNs which exists prior to introduction of direct plans.”

Hemant Rustagi of Wiseinvest Advisor says that only savvy HNIs and corporates have moved to direct. “Direct equity AUM is 7% of total equity assets. It is not a big number. Retail investors have continued to invest through distributors.”  

The only segment which has seen significant jump in direct plan AUM is debt category. Corporates, who used to park money in debt funds through distributors, have moved to direct plans in a big way. As on December 2014, the direct plan AUM of debt funds stood at Rs. 3.45 lakh crore.

Together, debt and equity fund direct plan AUM stood at Rs. 3.68 lakh crore, which is roughly 35% of the total Rs. 10.51 lakh crore industry AUM as on December 2014.