At a time when most mutual fund (MF) houses in India are struggling to break even, top distributors selling their products are earning crores of rupees in commissions.
Sample this: Foreign bank HSBC earned commissions worth Rs 118.96 crore in the financial year 2010-11 — the highest among all MF distributors — data available on the Association of Mutual Funds in India (Amfi) website showed. It was followed by HDFC Bank (Rs 115.97 crore), NJ IndiaInvest (Rs 109.9 crore), Citibank (Rs 87.8 crore), Standard Chartered Bank (Rs 76.63 crore). Collectively, 403 mutual fund distributors earned Rs 1,794.4 crore in commissions in FY11.
Assuming that 30-35 per cent of the commission earned is spent in operational and employee costs, top distributors like banks should be making a net profit of Rs 65-70 for every Rs 100 earned in commission, according to industry executives.
|RAKING IN THE MOOLAH
Commissions earned by top 10 distributors in FY11
||Amount in Rs cr
|NJ IndiaInvest Pvt
|Citibank N A
|Standard Chartered Bank
|JM Financial Services Private
|Kotak Mahindra Bank
|State Bank of India
|Source: Amfi Data compiled by BS Research Bureau
In contrast, nearly half of the fund houses in FY11 had posted losses, data from Delhi-based MF tracker Value Research showed. Only four fund houses — Reliance MF (Rs 261 crore), HDFC MF (Rs 242 crore), Birla Sunlife MF (Rs 84 crore) and ICICI Prudential MF (Rs 71 crore) — had made net profit of over Rs 50 crore in FY 11.
According to industry experts, neither fund houses, nor investors are making money. Rather, the top distributors are the main beneficiaries.
“Selling is the real work in mutual fund business. On an average, around 25 per cent of the commissions turn out to be profits for distributors,” said Dhirendra Kumar, chief executive officer at Value Research.
To be fair, commissions earned by top MF distributors have nearly halved from the peak seen in 2007. “Relative to the heydays in 2007, commissions of MF distributors have come down sharply. The biggest amount in those days came from equity new fund offerings (NFOs),” said Dhruva Raj Chatterji, senior research analyst, Morningstar India.
At that time, some fund houses paid five per cent upfront commission to distributors for bringing in money for their equity NFOs. However, after 2008, the Securities and Exchange Board of India (Sebi) has been discouraging fund houses from launching look-alike NFOs.
The ban on entry load in August 2009 had also lowered commissions for MF distributors. “After the ban on entry load, asset management companies are now compensating the upfront commission to distributors. However, their ability to pay from their pockets is getting limited due to depleting reserves. The upfront commission has already come down from what it was at the time of the entry-load ban and it is likely to go down further,” Morningstar’s Chatterji said.
According to industry executives, upfront commission paid to MF distributors has now declined to 75 basis points, from 1.2-1.5 per cent in August 2009.
"There is no equity cult in India. Mutual fund still remains a product which has to be sold. And to sell one needs to set up for distribution,” said Hemant Rustagi, chief executive officer at Wiseinvest Advisors.
Commissions paid to the distributors are a mix of upfront and trail commissions. These commissions are normally paid from the expense ratio which fund houses charge to investors. Since, the ban on entry load fund houses are paying upfront commissions from their pockets. In case of equity schemes, based on AUM, expense ratio could be between 1.5 per cent and 2.5 per cent.