Mutual fund distribution fee peaks to 55% of expense ratio
Mumbai, December 26, 2022
MFs profit come under pressure
The distribution commission paid by mutual funds has increased to 55 per cent of the expense ratio against 45 per cent logged in last three years and this has shrunk mutual funds profit.
After the ban on upfront commissions, distributor profitability has recovered at a compounded annual growth rate of 30 per cent since FY’19 against 15 per cent for asset management companies, said a Kotak Institutional Equities Research study on back of recent SEBI decision to review fees charged on investors and expenses incurred by mutual funds.
SEBI initiates study
Market regulator SEBI on Friday said it has initiated a study on regulatory provisions on fees and expenses in mutual fund schemes market compared to the existing market practices.
The study will endeavour to provide data as input for policy formulations. SEBI said its policies seek to balance the need for facilitating financial inclusion, encouraging new participants, leveraging economies of scale, encouraging adoption of technology, discouraging cross-subsidisation across schemes, closing arbitrage opportunities and curbing malpractices.
“While it is hard to comprehend what exactly induced the SEBI review and its conclusion, we expect a greater focus on and scrutiny of distribution payouts as against another round of sweeping overall expense ratios,” said Abhijeet Sakhare, Vice President, Kotak Institutional Equity Research.
Distributor commissions at the time of fund launches have been quite elevated and along with potential cross-subsidisation across older and newly launched schemes enable higher payouts. While there are no rules governing the commission sharing between AMCs and distributors, any form of cross-subsidisation impacts existing investors in the older schemes and will attract the regulator’s attention, he said.
The asset under management of equity new fund offers has increased to ₹1.20 lakh crore in March 2022 against ₹90,000 crore at the time of NFO launch. The commission paid for distributing new equity schemes is much higher than debt and passive funds.
The overall commission paid to the distributor for NFOs has increased to 85 per cent against 81 per cent and 73 per cent logged in last two years.
Kotak Institutional Equity Research believes that peak aggression on commission sharing with distributors has already started tapering down and will come under pressure due to slower inflow which will lead to greater focus on client retention.
Moreover, most large AMCs have filled their product portfolios in the past 2-3 years and incremental fund launches by smaller players is unlikely to significantly distort commission payouts at the sector level, it said.
[The Hindu Business Line]