Rs 250 SIP: Mutual fund distributors flag cost challenges even with incentives, subsidies

The distributor fraternity, which plays a key role in selling mutual funds to retail investors, has largely welcomed the capital market regulator’s suggestion of introducing a micro-SIP of Rs 250 but added that there could be some challenges around costs despite the proposed incentives.

On Wednesday, the Securities and Exchange Board of India (SEBI) released a consultation paper, proposing a Rs 250 SIP aimed at promoting financial inclusion and systematic saving. While some mutual fund houses already offer SIP options as low as Rs 100 in some of their schemes, it is not an industry-wide practice.

Meanwhile, distributors are of the view that the micro-SIP has the potential to enhance the reach and penetration level of mutual funds though there could be certain initial challenges in terms of costs especially since many of such small investors would need additional hand holding in terms of advisory as well.

Simply put, from a distribution perspective, the current model may lack commercial viability despite initial incentives, they say.

“The real test is in ensuring long-term servicing and support for small investors, who are more likely to need guidance during market downturns,” says Anil Rego of Right Horizons.

Another mutual fund distributor, wishing not to be named, said that even with the proposed incentives, initial costs might rise, though he added that most distributors would be willing to absorb these to benefit investors and broaden mutual fund participation.

To encourage distributors to promote the low-cost SIP, the SEBI consultation paper has suggested a Rs 500 incentive for educating first-time investors in mutual funds and supporting sustainable long-term investments.

But this incentive will be restricted only to the first small ticket SIP, as per the SEBI paper. In other words, a maximum incentive of Rs 500 per investor will be allowed.

“Not everyone is focused solely on immediate profitability. This model emphasises acquiring customers and leveraging cross-selling opportunities,” says Sachin Jain, Managing Partner at Scripbox.

“Platforms with existing user bases, like payment or financial apps, can introduce micro-SIPs to cross-sell products like insurance. It is a user-driven approach for activation and profitability. For financial planners, though, this model doesn’t align with personalised advisory services,” adds Jain.

In a similar context, Ankur Kulkarni of Moneywise Financial Services says that the Rs 250 SIP is a positive step to lower entry barriers for low-income individuals though feasibility will be challenging initially even as SEBI aims to offset costs with incentives and subsidies.

“As investors gain confidence and income, they are likely to increase contributions. Consistent guidance fosters loyalty, helping distributors achieve break-even over time. Success hinges on scale. This promotes financial inclusion and literacy among workers like drivers and maids,” he says.

As per the SEBI paper, industry participants have agreed to offer “discounted rates” to help AMCs break even on the costs of these investments within two years. Currently, AMCs incur costs such as registrar fees and custodian fees apart from other distribution and marketing costs, management costs etc. Additionally, part of the AMCs’ investment costs is proposed to be compensated through the Investor Education and Awareness Fund.

Santosh Joseph of Germinate Investor Services sees the Rs 250 investment as an opportunity to make mutual funds accessible. However, he stresses addressing intermediation and distribution costs, particularly for on-boarding through KYC, paperwork, and manpower, whether online or offline.

“The model works best with large-scale adoption. Building robust tech platforms requires significant investment, and achieving scale takes time,” says Joseph while adding that the Rs 250 minimum investment creates psychological comfort, encouraging higher participation levels.