Is Zerodha’s entry a turning point for the MF industry?

The decision of the Securities and Exchange Board of India (SEBI) board meeting in December 2020 eased rules for sponsoring MFs for entities to “innovate and reach out to more investors at a faster pace, including technology-enabled solutions”. can go”. SEBI stipulates applicants who do not meet the profitability criteria can get MF license if they have net worth ₹100 crores. This net worth limit must be maintained by the Sponsor until it continues to generate profits for at least five years. For fintech mutual funds offering direct plans that bring no commission, a fund house can provide a path to monetization.

What will be the impact of Zerodha’s entry?

Costs in India’s MF industry have been falling since SEBI’s cap on expense ratios in December 2018. Rising assets under management of low-cost passive funds, growth of direct MF platforms and assets held in commission-free direct schemes have reinforced this trend. Thus investors are likely to benefit from lower fees and increased competition in the industry. In stock broking, Zerodha reduced the brokerage cost across the board, with many established players subsequently reducing their brokerage as well. The firm may replicate its ‘discount broking’ model in the MF space.

Why is passive investing favored by new entrants?

According to media reports, Zerodha will focus on low-cost passive funds. These types of funds track the index rather than try to beat them, and this allows them to keep costs down. Actively managed funds have failed to outperform a growing number of indices and this is turning investors to passive funds. It is also cheaper for the fund house to launch a passive fund.

Could there be a conflict of interest?

Zerodha also allows investors to buy direct schemes of MFs through its platform ‘Coin’. However, when Zerodha launches an MF, there may be an incentive for the firm to direct coin users towards its own fund house. This could also be an issue for other MF distributors or customers of fintech platforms who have applied for MF licenses or acquired fund houses like Grow and NJ Group. This may act as a backward integration for them, but they have to maintain the boundaries between the distribution and fund management arms.

Can Zerodha manage money?

Zerodha does not handle money. Zerodha co-founder Nikhil Kamath has managed the founders’ proprietary funds in the past. He founded an alternative investment fund provider called True Beacon in 2019. However, according to a senior executive, it will be kept completely separate from the AMC business. Zerodha will largely focus on passive funds that do not require active management. For this type of fund, investors should evaluate the type of index selected and the tracking error (deviation from index return) of the fund.