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Rising share of direct plans; AMCs continue to benefit

Our top picks: HDFC AMC and Nippon AMC

* The direct channel in India’s mutual fund industry has shown a clear trend of steady growth, marked by increased adoption across investor segments, particularly among corporates, high-net-worth individuals (HNIs), and a growing number of younger investors.

* As of Mar’25, assets under management (AUM) via direct plans accounted for 30% of the total industry equity AAUM, up from 21% in Mar’20. This growth signals a shift toward cost-efficient investing, especially among financially savvy investor segments.

* Corporates remain the largest contributors to direct AUM, making up 61% of this channel, followed by HNIs and retail investors. In contrast, regular plans continue to be the preferred route for most retail and HNI investors, underscoring their reliance on intermediaries such as distributors and advisors.

* While direct plans are gaining traction, they still exhibit shorter holding periods compared to regular plans. As of Mar’24, only ~7.7% of direct plan investments had a holding period of over five years vs. ~21.2% in regular plans. Among SIPs, this gap is evident as well—~23.0% of regular plan SIP AUM had been held for over five years, compared to just ~12.4% for direct SIPs. This suggests that while the direct channel is expanding, long-term investment discipline is still more prevalent among guided investors using regular plans.

* Interestingly, the younger age groups (18-34 years) are increasingly opting for direct SIP investments, reflecting growing digital literacy and self-driven financial decisionmaking. Their share of direct SIP AUM rose to 23.6% in Mar’24 from 20.1% in Mar’19.

* Women are increasingly opting for direct mutual fund investments (20.3% in Mar’24 vs. 14.2% in Mar’19), especially younger investors. Their share in direct SIP AUM has grown, driven by rising financial awareness and digital adoption. This marks a shift toward more independent, cost-effective investing.

* AMCs are taking measures to maintain a balanced approach that caters to both selfdirected investors and those seeking advisory services through regular plans.

* For AMCs, the adoption of the direct route has led to strong inflow growth. On the other hand, distributor-led models such as Prudent will face challenges. HDFC AMC and Nippon AMC are our top picks, while we have a Neutral rating on Prudent Corporate.

Growth catalysts for direct plans

* Platforms like Groww and Zerodha have democratized access to mutual fund investing with easy, commission-free direct plans, attracting a wave of first-time investors.

* Lower expense ratios in direct plans enhance long-term returns by minimizing costs, thereby allowing greater capital compounding over extended investment horizons. For e.g., based on 5-year CAGR returns, 1) the SBI Blue-chip direct plan gave 0.85% higher returns than the regular plan, 2) the HDFC Large Cap Fund direct plan gave 0.69% higher returns than the regular plan.

* The younger generation has led the shift, with SIP AUM growing 2.6x over five years, reflecting growing confidence in self-managed investing, supported by fintech platforms and financial awareness.

* Passive investment products (index funds and ETFs) are increasingly being purchased via direct plans (~73.1% of index fund AUM as of Mar’24).

* Corporate entities continue to be the largest contributors to direct plan AUM, holding a 61% share. For corporates, direct plans are a cost-effective way to manage treasury investments without the need for intermediaries.

* As of Mar’24, ~90% of mutual fund transactions were conducted digitally vs. ~79% in FY19. E-KYC, user-friendly apps, and seamless online onboarding have made investing through direct plans easier and more accessible than ever before.

Share of direct plan on an uptick

* The SEBI’s mandate in Sep’12, directing mutual fund houses to offer direct plans alongside distributor-led options, marked a pivotal shift in the industry, serving as the foundation for the subsequent growth of direct investing, which began with the launch of direct plans in Jan’13.

* The share of direct plans in the total equity AAUM of the mutual fund industry increased to 30% in Mar’25 from 21% in Mar’20, with the contribution from B30 locations rising to 22% in Mar’25 from 14% in Mar’20.

Diverging preferences between direct and regular plans

* Trends in the direct total AAUM plans indicated that corporate investors occupied a dominant position with a 61% share of the total direct plan AUM, followed by HNIs at 20% and retail investors at 15% as of Mar’25. In Equity AAUM direct category, the retail segment dominated at 39%, followed by HNIs at 35%.

* In the regular plan category, HNIs accounted for the largest share (46%), followed by retail investors (37%) and corporate investors (17%) as of Mar’25. The preference for regular plans, particularly among HNIs and retail investors, implies a continued reliance on intermediaries such as advisors or distributors. For Equity AAUM, the retail segment constituted 47%, followed by HNIs.

* However, when focusing solely on individual investors (HNIs, retail, and NRIs), a different trend emerges. HNIs show a higher preference for direct plans, leveraging their financial awareness (20% in Mar’25 vs. 16% in Mar’20). Nevertheless, a significant portion of their investments still remains in regular plans, reflecting a continued reliance on intermediaries.

* Retail investors, on the other hand, have a higher allocation in regular plans, highlighting their ongoing dependence on advisors and distributors. This suggests that while cost-effective investing is gaining traction, many retail investors still prefer the ease of access and guidance provided by intermediaries.

Deepening reach beyond T30

* Over the past few years, mutual fund investments in India’s B30 (beyond top 30) cities have witnessed a significant structural evolution, transforming from nascent participation into a key growth driver for the industry, underpinned by a combination of targeted investor education, rising digital penetration, and the growing financial aspirations of a younger, tech-savvy demographic.

* AMFI’s continuous efforts to highlight mutual funds as a retail-friendly product with options for all income groups have helped bridge the gap between urban and rural investors.

* A strong preference for equity-oriented schemes (86%), increasing adoption of direct plans, and deeper engagement from first-time and women investors (28%) further underscore the momentum.

* B30 AUM rose to INR12.2t by Mar’25 (18%) from INR3.9t in Mar’20, representing a 26% CAGR. Equity AUM in B30 cities saw a robust CAGR of 37%, increasing to INR9.3t from INR1.9t in Mar’20.

* Between Mar’23 and Jan’25, the mutual fund investor base in B30 cities grew significantly from ~10.3m to ~20.8m, clocking a CAGR of 36%. In contrast, T30 cities have seen a 22% CAGR during the same period, indicating a faster adoption of mutual fund investments in emerging cities. (https://tinyurl.com/3adkh5yk).

* Systematic investment plans (SIPs) have witnessed increased traction in B30 cities. The share of B30 locations in new SIP registrations rose to 56% in FY25 (up to Jan’25) from 49% in FY23 (https://tinyurl.com/3adkh5yk), while in direct plans, it rose to 49% from 33% during FY23-25.

* As distribution models evolve and fintechs continue to democratize access, B30 cities are fast becoming the next frontier of retail mutual fund expansion in India.

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