Paytm Money, others to give investors their 'Jio' moment?

Asset management companies (AMC) paid a whopping Rs 8,533 crore to about 1,000 top Mutual Fund (MF) distributors by way of commission and expenses in FY18. 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. This is expected to be a disruptor, given Paytm’s wide user base and could give investors their ‘Jio’ moment in MF investing. DNA Money looks at existing platforms.

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 direct plans are best suited for do-it-yourself investors, who have gathered investing experience and do not require any financial advice.

Higher returns
A direct plan, that is, investments not routed through a distributor, has a lower expense ratio, excluding distribution expenses, commission, etc. 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 about 25% higher returns.

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, earns through trail revenue received from the fund houses. According to Scripbox’s, website it earns a small fee from fund companies for 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.

“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 keeping the technology secure is falling exponentially.

“We are passing the cost savings on to investors and making money on value-added services,” said Rustogi, which has over 50,000 users and the total asset under advice of over Rs 1,000 crore.

Portals like Paisabazaar 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.

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What option is the best
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,” said Bajaj.

Transparency is important, too. Does your advisor show performance of your investments across time periods, or hide this somewhere on the platform? Fees also determine how you decide. The less you pay in fees, the more you keep for yourself and that helps in compounding wealth faster. 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. Then you have no other option, but to go directly to the AMC.

Source: DNA Money