Passing fee cut to distributors may pull back MF industry's growth: Experts

The mutual fund industry could see its strong growth coming under pressure if bulk of the cut in total expense ratio (TER) is passed onto the distributors. On Wednesday, the panelists at the Morningstar Investment Conference welcomed the move on making mutual funds more cost-effective for investors but also stressed the importance of keeping distributors’ interests in mind.

Experts said if MF industry like in past, passes the bulk of the burden of fee cut to distributors, it would weigh on the industry’s future growth.

“When you are still at the stage of expanding the market, one has to really appreciate the benefits of TER cut. We will use the power of our digital footprint to keep things going digitally as commissions and intermediary yields come under pressure. At this point, there are still lot more people investing in insurance products than in mutual funds. If the TER reduction transmits directly into reduction for distributors, it could impact the momentum to some degree,” said Shilpa Kumar, chief executive officer and managing director of ICICI Securities during the panel discussion on ‘impact of TER cut’.

According to data from the Association of Mutual Funds in India, ICICI Securities is the sixth largest MF distributor in terms of commissions (Rs 3 billion in FY18). 

“The reality is that the cut in TER will be largely passed onto the distributors. That is given. This will hurt distributors as they have their own set of operating costs. You can’t expect them to suddenly bring in efficiency in their operations,” said Ajay Bagga, industry veteran and current executive chairman at OPC Asset Solutions.  

TOUGH CALL

• IFAs working on a smaller scale could be impacted more 
• Only half of the 1 lakh distributors in India are active
• At present, the distributor-to-investor ratio stands at 1:270

On the sidelines of the conference, some of the panelists observed that economies of scale do not come easily in distribution business as the variable costs are higher. On the other hand, MFs have high operating leverage due to a lot of fixed costs, they said.

The Securities and Exchange Board of India (Sebi) issued a circular on Monday that formalised the cut in total expense ratio (TER) with immediate effect. While up until last month, regulations allowed 2.5 per cent TER for the first Rs 1 billion of an equity scheme’s net assets, the new slabs introduced by Sebi now allow equity schemes with assets of up to Rs 5 billion to charge 2.25 per cent TER.

Besides introducing new slabs, the circular formalised scrapping of the upfront commission, except in the case of systematic investment plans (SIPs). The additional TER of 30 basis points for B30 (beyond top-30) cities would only be allowed on inflows from ‘retail’ investors. Till ‘retail’ is not defined, the additional TER would be allowed on inflows from individual investors.

In the case of SIPs, the upfronting of trail commission may be for total SIP inflows of up to Rs 5,000 per month, per investor. This upfronting shall be up to one per cent of total SIP inflows for a maximum of three years.