The Securities and Exchange Board of India’s (Sebi’s) decision to abolish the extra commission for mutual fund distributors in 15 more cities and towns — from Guwahati in Assam to Raipur in Chhattisgarh — has been received well by India’s Rs 22-trillion mutual fund industry.
According to sector officials, the move will help to bring 30 cities on a par and arrest the churn rate in these regions.
Further, they added the 15 cities were not small ones and mutual fund distribution could grow on its own without additional incentives.
Effective from April 1, 2018, mutual fund distributors (MFDs) in cities such as Ranchi, Jamshedpur, Patna, Coimbatore, Rajkot, Indore, Bhopal, and Varanasi will not be given an extra 30-basis-point (bps) commission.
Sundeep Sikka, chief executive officer (CEO) of Reliance Nippon Life Mutual Fund, said, “The special incentives for B-15 cities had certain objectives to help penetrate mutual funds. I believe the objective has been well achieved and sops withdrawal should be later extended to 50 cities. Such incentives can't be permanent at a time when all stakeholders are fast realising that total expense ratio (TER) has to come down.”
According to Sikka, the move means that the industry should go now deeper in the country. “These cities can take care of themselves for further growth, now the need of the hour is to concentrate more on India's hinterland towns."
Other executives echo similar views.
The CEO of a mid-sized fund house said: “It is true that the additional commission has worked but at the same time we observed there was a big churn happening in B-15 cities. Investors did not complain as they made good money. The extra commission was nothing but a subsidy to smaller cities at the cost of big cities' investors. I think, gradually, it should be abolished altogether.”
When asked about the impact of this move on the sector's growth, sector officials say it will not have any significant impact, if any. According to Sikka, “I don't think there will be any impact on the industry's growth. These are big cities, investors and distributors are educated, and know why mutual funds are important.”
In the past five years, since 2012, when B-15 incentives were announced, assets under management in B-15 cities as of December 2017 stood at Rs 3.59 trillion against Rs 0.77 trillion in 2012. This means a robust annualised growth rate of 36 per cent. During the same period, assets from T-15 (top 15) cities grew 24 per cent on an annualised basis from Rs 6.14 trillion to Rs 17.7 trillion.
What is interesting is the growth of systematic investment plans (SIPs) in B-15 cities. It grew from a mere Rs 4.2 billion to Rs 23.11 billion — an annualised growth rate of 41 per cent.
It grew from a mere Rs 4.2 billion to Rs 23.11 billion — an annualised growth rate of 41 per cent. Total SIP amounts from T-15 cities grew from Rs 7.4 billion to Rs 38.1 billion — an annualised growth rate of 39 per cent.