Dec 16, 2022
Fund houses, distributors jittery about more caps on TER
The Securities and Exchange Board of India is currently studying the fee taken by mutual fund houses for various schemes, a move that is a tad worrisome for sector players as there may be further reduction in the total expense ratios charged by them from their customers.
Sebi’s move comes after complaints that distributors are shifting investors to new schemes from old ones to earn higher commissions being offered by some fund houses.
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The market regulator is also been pushing direct plans – which incidentally completed 10 years in 2023.
“This does seem like a push towards direct plans, which could change the dynamics of the industry. However, this won’t change much for AMCs as far as financials are concerned because though costs pertaining to distributors and commission may reduce, expenses on marketing and setting up customer service platforms to deal with investor issues will simultaneously rise,” said a CEO of a fund house, who did not wish to be named.
According to him, such a move could reduce distributor participation further. “With increased investor awareness, direct plans have good prospects,” he added.
The mutual fund industry has been working towards increasing the number of distributors. In March last year, the Association of Mutual Funds in India (Amfi) announced an internship programme to groom mutual fund distributors.
Later, Amfi also came out with a media campaign called “MFD Karein Shuru” to establish MF distribution as a lucrative profession. As a result, over 20,000 people took up the MF distribution licences in 2022 compared with 17,000 in 2021.
At present, the maximum total expense ratio (TER) that can be charged by smaller players, with assets under management (AUM) of up to Rs 500 crore, is 2.25% for equity schemes and 2% for debt funds, according to the Association of Mutual Funds in India (Amfi).
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This reduces with an increase in the AUM size of a fund house. For the larger players with an AUM over Rs 50,000 crore, the same stands at 1.05% and 0.8%, respectively, since 2020.
Sebi had in December said it has initiated a study into such fee and expenses charged by fund houses, with the objective of getting inputs for future policy formations.
TERs typically comprise management and administrative costs as well as distribution fee. The Rs 40-trillion mutual fund industry has 43 players at present.
According to Moin Ladha, partner at Khaitan & Co, the move is primarily aimed at enhancing transparency and accessibility to investors. He agreed that making direct plans more popular is a likely objective.
“With TERs having been reduced already, it is not clear how much more they could bring it down. However, the hit on AMCs’ profitability may not be as much, given that higher investor awareness will lead to a rise in volumes,” he added.
A top executive of a fund house said on the condition of anonymity that this is unlikely to affect the profitability of asset management companies to a large extent.
The executive stressed that direct plans, with attractive returns and no commission involved, have become favourable with newer generation, which is more tech-savvy and has wider access to information.
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