Brokers see hit on distribution income as flows in equity schemes taper

The brokerage houses are bracing for pressure on distribution income amid a slowdown in equity scheme flows, along with declining asset values triggered by a correction in

“Distribution of equity and equity linked products accounts for a significant part of the distribution income. The correction in asset prices will have an impact on this income stream,” said Jimeet Modi, chief executive officer of Samco Securities.

“Due to the lockdown, it has been difficult to make fresh sales of MF products. We are also seeing a slowdown in equity scheme flows. Brokerage incomes have so far been steady, helping to mitigate the impact,” said chief executive officer of another broking house, requesting anonymity.

In April — which was the first full month post-lockdown — equity flows were down 47 per cent down to Rs 6,212 crore, reflecting the impact of lockdown and the pandemic.

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While fresh flows are showing signs of slowing down, redemptions from existing investors have started to accelerate.

“Sharp correction in stock prices and credit events has resulted in mutual fund redemptions from some retail investors. These redemptions, coupled with lower NAVs (net asset values), would be a double whammy for ICICI Securities (I-Sec)… in the near term, earnings growth would be driven by cost control rather than by revenue growth,” analysts at Motilal Oswal Financial Services pointed out in a recent outlook note on I-Sec, which is country’s 2nd largest non-bank MF distributor after NJ India Invest.

“To offset impact on distribution income, we are advising clients to make lumpsum investments and systematic investment plans in equity products, as current valuations offer attractive entry points,” Modi said.

“We are advising clients to ensure 16-18 months of liquidity. And use 30 per cent of the remaining surplus to invest in MF products so that they are not compromising on monthly cash flow needs in the prevailing lockdown conditions,” he added.

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While market volatility has hurt sentiments of MF investors, market volumes have seen a pick-up as investors are looking at making direct equity investments to gain from beaten down stock prices.

The cash market monthly average volumes for April crossed the Rs 50,000 crore-mark on NSE, which was an all-time high.

Higher trading volumes in cash — where yields are typically higher — is likely to give some cushion to on their income streams.