The Securities and Exchange Board of India’s (Sebi) move to stop fund houses from incurring additional expenses on account of B30 incentives may not have a huge impact on the mutual fund (MF) business, say industry executives. The top 30 cities are referred to as T30, while others are referred to as B30 (beyond top 30), with the classification based on AMFI’s best practices guidelines.
“This was bound to be discontinued sooner or later, as it was introduced to give a push to MF products in smaller towns. The hit to profitability would depend on the fund house’s size. The larger ones with a wider reach may see some impact, but the smaller ones that may not have much of a presence beyond bigger cities could see limited impact,” said the CEO of a fund house.
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From a distributor’s perspective, industry experts said those fully dependent on mutual fund sales would have to increase their corpus to make up for the losses or they will have to widen their product base.
The B30 incentive is given to distributors for bringing in fresh inflows into schemes from cities other than the top 30 — an initiative started to widen the reach of MFs in smaller cities. As per AMFI data, the contribution of B30 cities to total assets of the MF industry stood at 17% in February. Assets from B30 locations as of February amounted to Rs 6.9 trillion. Equity schemes held 79% of the assets from B30 cities in February, while in T30 cities the figure was 46%, showing that B30 regions lean towards equity.
A top executive of another fund house pointed out that the regulator has kept this in abeyance, but it won’t be done away with completely. “The regulator has observed distributors indulging in churning between schemes, hence the suspension. However, they are likely to come up with a revised plan to ensure more transparency and to curb malpractices,” he said.
Industry experts said Sebi’s decision comes on the back of misuse of these incentives by some distributors. Dhirendra Kumar, founder and CEO of Value Research, said, “Many of them are indulging in switch transactions, which means moving money from one scheme to another. While it is registered as new money coming into a new scheme, the redemption is not actually realised by anyone as the money is just being shifted.”
He highlighted that there won’t be an impact on numbers given the temporary nature of the ban, adding that the regulator is working on a newer incentive model as it realises the importance of the growing B30 market.
Reports suggest the regulator observed certain malpractices among distributors. These included splitting investments as the incentive was applicable for investments up to Rs 2 lakh.
Despite the discontinuation of the incentive, the role of distributors isn’t seen being reduced. The CEO of one of the largest MF distributors in the country said: “The allegations of mis-selling isn’t totally accurate. While churning was taking place to maximise commissions, these were happening only in some pockets.”
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He explained that the role of a distributor is primarily threefold. First, to help investors understand the product; second, to help them set goals and achieve them; and third, to provide guidance and feedback even after the investment has been locked in.
In addition, he said with increased awareness among people about MFs even in smaller cities, the role of distributors has only increased, and there is a huge scope for them to expand their business not just in their perimeter, but also in nearby towns and regions where there is less competition and huge opportunity.