HNIs preferring fixed deposits over debt mutual funds, retail SIP traction strong: Motilal Oswal

Redemptions have been steady and most distributors MOFSL spoke to were of the opinion that redemptions would increase once the broader indices cross certain thresholds. However, fresh lumpsum inflows have been difficult to come by. The trend is more pronounced in the high-ticket segment. HNIs have been preferring PMS and AIFs as they find MF products commoditized, the note said.

Collection efficiencies in the smaller towns and cities have been trending higher for some distributors. Systematic Investment Plan (SIP) bounce rates have seen a significant decline from these geographies in the past few months.

The trend remains robust, particularly within the retail segment, where the average investment amount has been decreasing.

"This is encouraging for distributors as it indicates that new customers are joining at an accelerated rate. It has been somewhat difficult to maintain higher ticket SIPs among HNI customers as the returns on SIPs over the past three years have been minimal. As a result, the HNI segment has experienced lower renewal rates of SIPs," Motilal said.

There is an increase in enquiries regarding index funds. However, distributors are not marketing these products aggressively. The possibilities of generating alpha over the benchmark indices in case of a broad market rally continues to be the selling pitch of equity funds over index funds, MOFSL said.

"The expansion of passive investment options in the retail market is expected to take considerably more time," the note added.

Motial Oswal said that online distributors have been in the ecosystem for a long period (7-8 years) now. However, unlike their impact on the broking industry, they have not yet been able to disrupt the MF distribution space. In fact, in the recent past, a few of the online distributors have seen a negative net SIP count.

While offline distributors sell SIPs with a minimum tenure of 12 months, online players have been promoting SIPs of shorter durations such as 3-6 months, which has affected the renewal rates, as the returns for such short periods have been poor, it said.

The commission on NFOs have normalised by 5-10 bps over the past few months. There have been no significant alterations in commissions for existing mutual fund schemes. While the top 8-10 AMCs have not changed their commissions, smaller AMCs occasionally have doled out higher payouts, Motilal Oswal noted.

As the regulator is expected to decrease the TER that AMCs can levy on schemes, Motilal Oswal distributors anticipate a reduction of around 10-20 percent in commission rates. However, any further cuts beyond the same would be self-damaging to the industry. Also, these cuts could drive consolidation among distributors (some of it already happening). Currently, a Rs 2,000 SIP generates Rs 70 commission in the first year for a distributor.