Sebi diktat to book expenses helps MFs pare distribution-related costs

The Securities and Exchange Board of India’s (Sebi’s) directive to fund houses to book all scheme-related expenses has reduced distribution-related costs for some asset management companies (AMCs).

HDFC AMC — which is India’s largest fund house in asset terms — saw its fees and commission expenses dropping to 26 per cent to Rs 240 crore in 2018-19 (FY19).

“Due to regulatory changes, no commission was paid by the company on sales from October 22, 2018. Savings on this account have resulted in a reduction of commission expenses,” the fund house said in its recently published FY19 annual report.

“Certain scheme-related expenses and commission paid to distributors were being borne by the company till October 21, 2018,” the fund house added.

Reliance Nippon Life AMC, which is the other listed AMC, also reported 16 per cent fall in its fees and commission expenses. Against Rs 310 crore in the previous year, these expenses were down Rs 258 crore in FY19.

Experts say some of the steps taken by Sebi in the past few months should lead to higher margins for the fund houses. “Besides ensuring scheme-related expenses are not borne in AMCs’ books, the regulator has scrapped the upfront commission as well. These norms should lead to improved profitability for fund houses,” said an industry analyst.

While the larger fund houses are expected to see sharper cuts in their fee income, following revision of the total expense ratio (TER), experts say such fund houses should be able to limit the impact of TER cuts.

“Most of the large fund houses have said they would be passing on the bulk of the cuts to the distributors,” said an executive of a fund house. The new norms effectively require larger-sized schemes to have lower TERs, so that the benefits of scale reach the investors.

According to industry officials, the cut in TER bodes well for all stakeholders, as lower cost of investing will attract more flows towards mutual fund (MF) products.

However, independent financial advisors have written to officials of top fund houses, questioning why distributors should be bearing the brunt of the TER cuts.

To further compound matters, the MF industry is seeing a slowdown in investor flows. Between November 2018 and February 2019, the industry witnessed four back-to-back months of slowdown in equity flows. After seeing a bounce-back in March, the equity flows were back to February-levels of Rs 5,000 crore last month.  

Meanwhile, income schemes have seen Rs 68,000 crore of net outflows in the second half of FY19 due to debt market volatility triggered by the Infrastructure Leasing & Financial Services crisis.

New rule book
 

• Scheme-related expenses not to be borne in books

 

• No upfront commission to distributors

 

• Better ability to absorb or pass on the TER cuts

 

• Experts see improved margins for fund houses