Market regulator Sebi?s new guidelines aimed at increasing the penetration of the mutual fund industry beyond the top 15 cities may not show results in the immediate future, believe market watchers. Indeed, most fund houses view the expansion into smaller cities as a long-term goal, something that might take many months to fructify.
Sebi, in its new guidelines, has allowed AMCs to charge an additional total expense ratio (TER), of up to 30 bps, if the new inflows from these cities and towns aggregate up to a minimum of 30% of the total inflows. In case of lower inflows, the proportionate amount will be allowed as additional TER.
?The new ruling could potentially open up a whole new market for everyone. But it will take significant time and effort for the industry to get the required inflows from the smaller cities,? said Debashish Mallick, MD & CEO, IDBI Asset Management.
Market players are awaiting clarity on whether the additional TER will be charged on aggregate assets or new assets. ?It looks at if the additional TER will be given on the incremental assets built beyond the top 15 cities and may not include existing assets. If so, I?m not so sure whether fund houses will see it as enough of an incentive to go beyond the 15 cities,? said Akshay Gupta, CEO, Peerless MF.
According to Mallick, the main challenge in reaching the smaller towns and cities is building distribution coverage. ?The existing NISM certification requirement has proved to be a deterrent for many distributors in the smaller cities,? he said. In this light, Sebi?s new guidelines aimed at simplifying distributors’ registration process and including postal agents, retired officials from government, banks and retired teachers to distribute simple products may be a step in the right direction, added Mallick. An industry CEO pointed out that there is a possibility that the bigger fund houses may now go on an overdrive, opening branches and appointing relationship managers in the smaller cities, just to get the benefit of the additional expense ratio.
However, others believe that the biggies will not be in a hurry to expand into smaller cities. ?Several of the top 15 fund houses have closed branches in tier-III and tier-IV cities last year and these players will think twice before opening branches in the smaller towns,? said another mutual fund CEO.
According to a recent PwC report ?Is there a silver lining??, the top five cities (Mumbai, New Delhi, Bangalore, Kolkata and Chennai) contributed over 71% of the total MF AUM, with Mumbai accounting for more than 42%. Mutual funds will now have to make complete disclosures in the half-yearly report of Trustees to Sebi regarding the actual efforts of the mutual funds to increase penetration and the details of opening of new branches, especially beyond the top 15 cities.