As we mark the 11th anniversary of direct mutual fund plans pioneered by Asset Management Companies (AMCs) in January 2013, an interesting development is on the horizon regarding how investors would buy and sell units under the direct plan. These plans, devoid of distributor commissions, boast lower expense ratios and, therefore, higher returns than regular plans. Over the past five-plus years, companies such as Kuvera, MFUtility, Groww, Zerodha Coin, and MFCentral have emerged that help investors buy mutual fund direct plans via their online platforms. They have come to be called execution-only platforms (EOPs). As defined by SEBI, EOPs are digital/online platforms that facilitate transactions such as subscription, redemption, and switch transactions in direct plans of schemes of mutual funds. In June 2023, SEBI established a comprehensive framework outlining detailed categorisation and key operational aspects for EOPs. So, as an investor, here is what you should know.

What are the guidelines about?

Before implementing SEBI’s regulatory framework, EOPs operated in a quasi-regulatory environment as these platforms were registered as Investment Advisors (RIAs) but did not provide any advisory services. Consequently, investors utilising these platforms solely for execution lacked a clear avenue for grievance redressal. To address this issue, SEBI mandated existing EOPs and Register and Share Transfer Agents (RTAs) such as KFintech and CAMS that facilitate transactions in direct plans of MF schemes to obtain registration by September of the previous year.

Under the new framework, SEBI has delineated two categories of EOPs: Category 1, acting as agents of mutual funds, and Category 2, serving as agents of investors with trading membership of a stock exchange. As per AMFI, category 1 license holders include prominent platforms such as MF Utility, Smallcase, and Kfintech, while no platform has been specifically registered as a category 2. It is important to highlight those platforms affiliated with stockbrokers, such as Zerodha’s Coin and Groww, are exempt from EOP registration and can continue offering services with the existing broking license.

Differing platforms

Category 1 EOPs collaborate and integrate their systems with AMCs or their RTAs to provide financial services, including subscription and redemption, as well as non-financial services, such as updating contact details for investors and other intermediaries. Essentially, they function as digital extensions of AMCs, streamlining transactions in direct plans and consolidating orders for efficient execution, with a flat transaction fee of ₹2 borne by AMCs for their compensation, as the AMFI prescribes. Further, AMFI has allowed newer platforms to charge an additional fee of ₹0.5 to incentivise them. However, it’s crucial to note that the SEBI strictly prohibits AMCs from passing this cost to investors via the expense ratio (TER).

On the other hand, Category 2 EOPs, holding licenses as stockbrokers with SEBI, directly serve individuals and exclusively operate through stock exchange platforms. While they can facilitate direct plan transactions, aggregating orders is off-limits. Their fee structure involves a flat charge passed on to the investor, though the exchanges haven’t yet specified the upper cap. The determination of transaction fees, just like traditional and discount brokers, is entirely left at the discretion of these platforms. Consequently, should these platforms impose a fee, it remains to be seen how competitive they would be vis-a-vis the ₹2 being charged by EOP 1 players.

Investors takeaways

Investors may encounter challenges distinguishing between platforms provided by RIAs/brokers to clients and Category 1 and Category 2 EOPs. The choice concerns whether you prefer an AMC-integrated experience (Category 1 EOP) or a more independent, investor-centric platform (Category 2 EOP). In contrast, due to the absence of registered entities and the definitive guidelines for Category 2, it is recommended that investors exercise patience and closely monitor upcoming developments before making any financial decision. The SEBI framework for EOPs continues to undergo refinement, and additional regulations may be introduced in subsequent stages.

To sum it up, EOPs exclusively provide direct plans. Certain EOPs may establish a direct linkage with AMCs for unit generation for investors, while others procure units through exchanges or exchange-enabled mechanisms. Over the long term, SEBI aims for these entities to establish decent revenue models to ensure operational integrity and mitigate investors risks.

For DIY investors looking at direct plans, researching deeply about funds to invest in is the most critical task. With SEBI’s guidelines, some thought must also be given to choosing the right platform.