How customer-friendly are digital MF platforms?

Mutual funds (MFs) make money not just for investors, but for distributors/agents too. Asset management companies (AMC) paid a whopping Rs 8,533 crore to about 1,000 top MF distributors by way of commission and expenses in FY18. Yes, that's just in one year. But not every MF platform charges money from investors, or takes commission from fund houses.

Over the last one to two years, technology enabled platforms have started selling direct plans, which charge practically nothing from investors. The latest entrant is Paytm Money, a free app, which is registered with Securities and Exchange Board of India (Sebi) as an investment advisor and will soon offer direct MFs that do not charge commissions. While this is expected to be a disruptor, given Paytm's wide user base and give investors their 'Jio' moment in MF investing, DNA Money takes a look at existing platforms like Clearfunds, Kuvera, Paisabazaar, etc, to understand how investors can gain, and also study different service offerings related to MF advisories.

MF distributors or agents get money from fund houses for adding investors and bringing inflows. There are two parts of the commission MF distributors earn: upfront commission (one-time) and trail commisssion (recurring). Investors can bypass paying this commission by going 'direct'. There are three ways to do it. One, directly open fund account with respective AMCs (branch or online). Two, check out MF online platforms and use their free offerings to directly invest with funds. Three, use apps and web portals from Registrar and Transfer Agents (R&T) such as CAMS and Karvy. Do note that that direct plans are best suited for do-it-yourself investors, who have gathered investing experience and do not require any financial advice.

Direct plans offer higher returns

In January 2013, Sebi mandated MFs to compulsorily launch a direct plan for direct investments, that is, investments not routed through a distributor. Such a plan has a lower expense ratio, excluding distribution expenses, commission, etc, and no commission is to be paid for such plans.

The effect of not paying 1% annual commission is quite large. For example, a 30-year old investing Rs 5,000 per month for 35 years will be able to generate a corpus of Rs 1.08 crore by investing in direct plans, versus Rs 86.05 lakh by investing in regular plans, if the investments in both cases grow at 8% annually. Hence, by investing in zero-commission direct plans the investor gains 25% higher returns, as per rough calculations.

Types of online platforms

Online MF platforms can be grouped into two broad categories. One category has players like FundsIndia and Scripbox that do not directly charge investors for using the service, but receive money from fund-houses for bringing in investors. FundsIndia has no account opening charges, transaction or maintenance fees but, it earns through trail revenue received from the fund houses. Similarly, according to Scripbox's, it earns a small fee from fund companies for the additional services it provides to its investors.

The second category of online MF platforms are players like Clearfunds, Kuvera, Piggy, and Paisabazaar. They offer basic MF services free of cost, and also do not get any commission from fund-houses. For other value-added services, they may levy a fee.

"We find that a freemium model works best, so that new users exploring Clearfunds get our basic features at no cost, and can access richer functionality for a small annual fee of Rs 1,000 per portfolio per year. This lets us attract and grow our user base without spending too much on costly ad campaigns," said Kunal Bajaj, Founder & CEO, Clearfunds.

If others are charging money, how can the same services be free? Kuvera co-founder and chief executive Gaurav Rastogi explained that finance can be easily digitised, and the cost of maintaining the digits (is it technology) securely are falling exponentially.

"We are passing the cost savings on to you and making money on value-added services. This along with the broking community, which was sitting on fat yearly commissions, without providing much service made it ready for digital disruption," said Rustogi, which has over 50,000 users and the total asset under advice of over Rs 1,000 crore.

Many portals like Paisabazaar are open about the fact that they don't make any money, when you buy MFs through them. But, they hope that in the future investors may choose the same platform for other commission-bearing financial products like loans, credit cards, insurance etc.

Platforms like Coin by Zerodha do not charge any fee for investments up to Rs 25,000 and thereafter a fee (Rs 50 per month). Players like Jama and Wealth Trust do have a free basic version offering, but they also have versions that are paid products. At present, Paytm Money has not launched its service. Its website says investors can get up to 1.5% (annually) higher returns with direct plans of MFs. It does not want to charge any commission.

What option is the best

So, should an investor decide which platform to use based on just fees or the lack of it? An investor should judge a platform based on convenience, transparency and quality of advice.

"Of these, quality of advice is hardest to judge and will only be proved over time. So check whether your online adviser truly has the experience to recommend funds for your long term savings or has built a back-tested algorithm for the same. You'll find that most advisors claim to have built and algorithm, but can't seem to demonstrate or explain how it works," said Bajaj.

Transparency is extremely important. Does your advisor clearly show performance of your investments across time periods, or hide this somewhere on the platform? You definitely should find out the answer.

Fees are, of course, part of how you decide. The less you pay in fees, the more you keep for yourself and that helps in compounding your wealth faster. "Other than fees, we think two other factors are equally important. First, does the human intelligence behind the app have prior portfolio management experience or are they going to learn on the job with your money on the line? Second, what features are available and how will it make your investing life easy? Investing is a lot more than the ability to buy and sell online," pointed out Rastogi.

The length and breadth of MF offerings are also important. Some platforms do not offer all the 40 odd fund-houses offerings on their platform. In such a case, you will have no other option but to go directly to the AMC.

GROWTH IN DIRECT PLANS

• As on July 2018 about 10% of the retail investors chose to invest directly, while 19.7% of HNI assets were invested directly 40.8% of the overall assets of the mutual fund industry came directly A large proportion of direct investments were in non-equity oriented schemes where institutional investors dominate. 70% of liquid / money market scheme assets where institutional investors dominate, were direct, whereas 49% of debt oriented scheme assets and 16% of equity scheme assets were direct
   
• The proportion of direct investments in equity, to the total assets held by individual investors, was about 8% in July 2018

Source: Amfi