Franklin Templeton Mutual Fund investors have a reason to cheer.

From May 09, 2019, Franklin Templeton Mutual Fund waived off the exit load charged in all open-ended schemes on switching from a Regular Plan to Direct Plan. The AMC has released an addendum in this regard.

Is it bad news for Independent Financial Advisers / mutual fund distributors?

Let’s find out…

What does this move imply?

 The capital market regulator has been nudging mutual fund houses to promote direct plans for a long time. The AUM of equity-oriented mutual funds has been consistently decreasing since the regulator banned upfront commissions.

According to data published by the Association of Mutual Funds in India (AMFI), net inflows in mutual funds, at Rs 4,608 crore, fell to a 30-month low in April 2019. Moreover, the net inflows in equity-oriented mutual funds have declined 35% in FY 2018-19 as compared to a year before.

As a result, it seems mutual fund houses have started taking proactive measures to push Direct Plans, and other fund houses are also likely to follow suit.

Declining AUMs are a cause of concern for mutual fund houses, and thus, in all possibility, may introduce investors to the benefit of a Direct Plan and ensure inflows are undisturbed even at a time when markets have hit a rough patch and it’s expected to become even more volatile in the coming months.

How will this affect mutual fund distributors and IFAs?

Specifically, in the case of Franklin Templeton Mutual Fund, the difference in the expense ratio of a Direct Plan and Regular plan has been well over 1% in some cases. This makes a strong case for the investors to make a switch from a Regular plan to a Direct plan.

However, while the abolishment of exit load will encourage investors to switch to a Direct Plan, the taxation element also needs to be considered; it could be a deterrent depending on the tax incidence due to such switches.

On exiting the regular plan within a year, if the investor makes any gains on their investments, this will attract short term capital gain tax at 15%. On the other hand, long term capital gains would be taxed at flat 10%, for gains over Rs 1 lakh in a financial year.

How can IFAs retain investors amidst changing business climate?

Since the launch of Direct Plans, PersonalFN has always encouraged investors to invest in a Direct Plan of a mutual fund scheme recognizing the benefit of doing so in the long run.

Direct plans generate roughly 0.5% to 1.0% additional returns every year. However, if you sow the seeds of these small savings, you could harvest rich rewards in 15-20 years — thanks to the power of compounding.

The table below demonstrates how small savings of 0.50% or 1% in the expense ratio over 30 years can make a huge difference, assuming a compounded annualised return clocked of 12%.

Table 1: Direct plan – Adding to your wealth…

  Direct Plan (in Rs) Regular Plan with 0.5% Regular Plan with 1%
Additional Exp. Ratio (in Rs) Additional Exp. Ratio (in Rs)
Initial Investment 10,00,000 10,00,000 10,00,000
Value After 30 years 29,959,922 26,196,666 22,892,297

(For the illustration purpose only)

You see, a slightly conservative estimate, considering the difference in the expense ratio would be just 0.5% every year, suggests that the money you would make in this 30-year timeframe would be over Rs 26 lakh.

On the other hand, the value of the same amount invested in a regular plan with 1% difference would be around Rs 22 lakh.

Therefore, even a lower expense ratio of 1% makes a significant difference of Rs 7 lakh.

A majority of investors, however, need handholding, especially the novice ones, and mutual fund intermediaries can play an important role in this regard.

The threat of losing business is real and mutual fund intermediaries have to focus on customer-centricity.

The ones doing need-based analysis (considering investors’ age, risk profile, investment objective, the financial goals and the time horizon to achieve the goals) before recommending products to their investors, and thereafter provide a piece of suitable advice are likely to sustain during tough times.

Independent investment advisers stand to gain as mutual fund houses make this shift. Investors might be willing to pay for their service to get better advice on which mutual funds to add to their portfolio.

In addition, it’s becoming increasingly crucial for intermediaries to offer more value-added services to retain customers.

Now on, it is unlikely that mutual funds houses will depend only on their distribution channels to promote their mutual fund schemes.

by PersonalFN Content & Research Team

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