Smaller fund houses are not too happy with the proposed hike of 0.25% in the total expense ratio (TER) mooted by the 14-member mutual fund advisory committee (MFAC) last week as they believe it will only help shore up the profits of the bigger fund houses. ?Mathematically speaking, the increase in 25 basis points will only help add to the profitability of the larger fund houses,? said the CEO of a foreign fund house.
At present, the first R100 crore of an equity scheme gets charged at 2.5%, the next R300 crore at 2.25%, the next R300 crore at 2%, and the rest at 1.75%, according to Sebi?s MF regulations. Let?s compare a fund house with equity assets of R5,000 crore with one with equity assets of R500 crore. For a 25 bps increase in TER, the former will stand to gain R12.5 crore, while the latter will earn just R1.25 crore.
?The impact of this difference will be felt in the long term. The bigger fund houses will use the extra corpus to pay more commission to distributors and for business expansion, which could indirectly hamper the growth of the smaller players,? said the CEO of another small fund house. Currently, about 30 players have equity assets of R3,000 crore or less. Back-of-the-envelope calculations show that the bottom 30 fund houses will earn just R31 crore by way of TER compared with R384 crore earned by top 10 fund houses. Market participants say the benefit of a higher expense ratio should be given to only those fund houses that are expanding into tier-II and tier-III cities as it will help them meet expenses such as investor education.
The proposal to transfer the exit load back to the scheme corpus rather than using it for sales and marketing expenses, such as distributor commissions, is also likely to put pressure on smaller fund houses. This is because they are under greater pressure to pay higher up front commission than the bigger fund houses to get distributors to sell their schemes. After the ban on the entry load, fund houses pay up front commissions from the account used for exit loads. According to industry estimates, fund houses typically pay a commission of 1.25-1.5% (both up front and trail commissions) to distributors. However, smaller fund houses end up paying anywhere between 1.5% and 2%.
The top 10 fund houses contributed about 78% of the total AUM of the entire mutual fund industry. As of June 30, the total AUM of MF industry stood at R6.88 lakh crore. The top 10 fund houses hold R1.54 lakh crore or 85% of the total equity assets. As of June 30, total equity assets of the 44 MFs were R1.80 lakh crore.