The new expense ratio regime at mutual funds has led to a fall in commissions for mutual fund distributors across equity schemes. The average distributable TER (total expense ratio) for mid cap and small cap schemes has seen a reduction of close to 3 basis points in Q1FY27. For flexi cap and large cap schemes the drop is over 2 bps and 6 bps, respectively. Distributors point out that the thinner margins are hurting their businesses and could result in a shake-out in the industry.
The new regime, which kicked in this fiscal, is aimed at increasing transparency in charges levied by fund houses to investors. The idea is to segregate expenses controlled by fund houses from charges like brokerage, exchange and regulatory fees and other levies like GST, STT, stamp duty etc.
Experts believe the lower commissions will pressure distributors to increase their sale volumes. Else, their incomes could be badly hit. Chennai-based distributor Chokkalingam Palaniappan of Prakala Wealth said the new regime has, on average, led to a 3-5 bps reduction in commissions. The going will be particularly tough, he believes, for newer distributors who need to work harder to build a clientele.
Siliguri-based distributor Prabin Agarwal observed that the break-even period for many of the new entrants will be longer. Agarwal believes that while the new structure and the reduction in margins is a natural progression for a growing industry, the impact in the immediate term could be significant for many distributors. Mumbai-based distributor Sadashiv Phene said the smaller commissions have left distributors unhappy, especially those that are already grappling with thin margins.
Palaniappan believes that over the longer term, reduced commissions and the need to increase volumes may lead to consolidation among distributors. Not too many will enter the business, he feels while smaller players may consider giving up an independent practice to join bigger outfits or even quit the industry.
Many distributors say the fall in commissions across fund houses has been uneven with some lowering the fees more than others. The general metric for distributor commissions– average distributable TER (Total Expense Ratio)—which is defined as the difference between expense ratios for regular and direct mode recorded a reduction following the implementation of the new regime across equity scheme categories.