Over the six-month period from April 2013 to September 2013, Independent Financial Advisors (IFAs) contributed the maximum (37%) to equity mutual fund sales

Most Independent Financial Advisors (IFAs), a ‘small’ mutual fund distributor community, were worried that they would lose business with the launch of direct plans of mutual funds. Many even complained that few of their clients have shifted to direct plans. However, IFAs, who cater mainly to small investors, have not only been successful in creating new mutual fund accounts in beyond the top 15 cities (B15 cities) they have done comparatively well in the top 15 (T15) cities as well. From their contributions to new systematic accounts created, it can be said that IFAs are not only promoting one time investments, but are encouraging regular savings as well. IFAs increased their share of equity mutual fund sales to 37% in H1FY14 from 33% in H1FY13.
 

Taking all mutual fund categories into consideration, IFAs contributed the highest share of 33.25% to new accounts created for bullet investments and 30.19% to new SIP accounts created between April 2013 and September 2013, according to data from CAMS, a registrar and transfer agent for mutual funds which accounts for 60% of the industry data. Overall, they contributed 31.74% to the total number of new accounts created. The next highest were other banks with a share of 23.74% in the six month period.
 

Equity Mutual Fund Sales
 

Despite a marked increase in the contribution of direct plans to equity mutual fund sales, IFAs too, managed to increase their share, even though the quantum of sales declined. The share of direct plans in equity mutual fund sales rose to 13% in H1FY14 from 5% in H1FY13. IFAs, managed to increase their share to 37% in H1FY14 from 33% in H1FY13. Banks witnessed a sharp decline, with their share falling to 18.52% from 26.08% over the same period. In H1FY14, national distributors had a share of 22%, while PSU banks had the lowest share of 2.33%.

In the T15 cities, IFAs took the lead for the top share in equity mutual with 31% in H1FY14 from 27% in H1FY13 surpassing national distributors and other banks which commanded a higher share for the same period the previous year. In the B15 cities, though IFAs still contribute more than half to the total equity mututal fund sales, their share fell marginally to 54% in H1FY14 from 55% in H1FY13. In these cities, national distributors increased their share to 16% from 11% in the same period last year.

SIP accounts created
 

IFAs also have the highest share for the number of new mutual fund SIP accounts created in H1FY14. In T15 cities IFAs have a share of 28% in the total new SIP accounts, marginally higher than national distributors which command a share of 27%. In B15 cities where IFAs have the strongest presence, they contributed 33% to the total number of new mutual fund SIP accounts created, while other banks and national distributors had a share of 22% and 21% respectively.
 

In T15 cities, other banks contributed the highest to new accounts created for lumpsum (or bullet) investments. IFAs were the second highest contributors with a share of 27%. In B15 cities, IFAs once again took the lead with a share of 46%. National distributors were the closest with a share of just 16%.

Despite this huge contribution from IFAs, the regulator continues to ignore this ‘small’ distributor community by coming up with regulations that harms their business. (Read: Mutual fund regulations: Who contributes the most to equity inflows is overlooked) Many IFAs have been asking for a ban on upfront commissions. Moneylife has highlighted in many articles in the past where distributors have resorted to excessive churning to earn higher commissions. Chilukuri KRL Rao, a small distributor from Hyderabad, has drawn our attention to the ground-level practices that hurt investors and smaller distributors. He says, “Small distributors who cater mainly to the small retail investors are willing to work even with low trail commissions due to their cost efficient business model. But, the main hindrance to the growth of the industry seems to be the way these incentives are being paid to a distributor.”
 

In a recent article, (Read: Equity mutual funds report rising sales outside top 15 cities!) we pointed out that mutual fund houses could be paying a higher upfront commission to national distributors for sales in B15 cities. This could be a reason why equity mutual fund sales in B15 cities have shown a growth while all investor categories in both T15 and B15 cities have reported a decline in sales. The Association of Mutual Funds in India (AMFI), has been known to support big fund houses and large distributors. Last year, AMFI scrapped the plan to ban upfront commission. Trail commissions, though lower than the one-time upfront commission, support the business model of small distributors and IFAs as they establish long-term relationships with their clients.