The Foundation of Independent Financial Advisors has urged mutual funds (MFs) to absorb the cuts arising from the change in total expense ratio (TER) and not pass them on to distributors.
In a letter to the Association of Mutual Funds in India (Amfi) on Wednesday, Fifa said: “... as far as the distribution community is concerned, similar economies of scale (like in MFs) at the distributor level has not been reached, given that the coverage and scope of the individual distributors is very limited.”
“If a distributor brings new business, there is a variable cost attached to it. The more clients you acquire, the more money you spend on such acquisitions. The benefits of economies of scale goes to MFs and hence, they should bear this cost,” said Dhruv Mehta, chairman of Fifa.
According to people in the know, some of the fund houses have already written to distributors that there will be cuts in their commission as the new TER structure took effect from April 1.
The letter added that Fifa’s discussions with the government showed that the cut in TER was not a step to cut the distributor commissions. The distributor body also warned that cuts on commissions would impeded the growth of the Rs 23-trillion MF industry.
“Any intended cut in distributor commissions would be counter-productive, against the objective of promoting the growth of the MF industry and not in consonance with the rationalisation behind the reduction in TER,” the letter read.
In September, the markets regulator Sebi had capped the maximum limit on expense ratio at 2.25 per cent, from the earlier 2.5 per cent. While this limit was for open-ended equity-oriented schemes, other fund categories also saw cuts.
It had also stated the industry must move to the full trail model without any upfront commission or upfronting of any trail commission.
Some exceptions have been made for systematic investment plans.