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

The cash market monthly average volumes for April crossed the Rs 50,000 crore-mark on NSE, which was an all-time high
Brokerage houses are bracing for pressure on distribution income amid slowdown in equity scheme flows, along with falling asset values due to a correction in markets. 

“Distribution of equity and equity-linked products acco-unts for a significant part of the distribution income. The correction in asset prices will have an impact on this income stream,” Jimeet Modi, CEO of Samco Securities, said.
“Due to lockdown, it has been difficult to make fresh sales of mutual fund products. We are also seeing slowdown in equity scheme flows. Brokerage incomes have so far been steady, helping to mitigate the impact,” said CEO of another broking house, requesting anonymity.

In April, the first full month of lockdown, equity flows were down 47 per cent to ~6,212 crore, reflecting the impact of the lockdown and the Covid-19 pandemic.
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 MF redemptions from some retail investors. This, coupled with lower NAVs, 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 said. 

“To offset the 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.  

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 a multiple years high. Higher trading volumes in cash markets, where yields are typically higher, are likely to give some cushion to brokerages on their income streams.  

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