The directive by the Securities and Exchange Board of India (SEBI) to asset management companies (AMCs) to lower the total expense ratio for mutual fund schemes is bound to impact all funds, but is needed. Sector experts estimate that, for equity schemes, the total expense ratio could come down to 1.7-1.8% and the cut in the fees would be somewhere in the range of 15-25bps for equity schemes. SEBI’s move to ask MFs to meet all commissions and expenses from the schemes and not from other sources as is often the case, is welcome. Since the larger AMCs typically have a bigger share of equity in their corpuses, they would be impacted more.
The capital market regulator has also mandated that payments to brokers, by AMCs, will now need to be in the nature of pure trail commissions rather than a mix of upfront and trail commissions. SEBI’s objective appears to be to reduce investor churn; it is no secret that agents coax investors to move from one scheme to another to make more fees for themselves. Indeed, there was a time when AMCs offered brokers as much as 4- 5% for new fund offerings (NFOs) so that they would persuade investors to move out of schemes and into the new one.
If there are no upfront commissions but only trail fees, agents will need to convince investors to stick with a scheme. This then means they must recommend schemes that perform well else investors will be miffed. To be sure, distributors are going to be miffed by the smaller commissions; since MF scheme are still somewhat of a push product, even if they are less so than insurance products, doing away with the upfront commission altogether might hurt business. In this context, when in mid-2018, SEBI lowered the equity-AUM fees, the industry passed on 70-100% of the impact to distributors.It is possible better practices will help brokers drum up more business. The last few years have seen fairly strong flows into equity schemes. From Rs 77,907 crore in 2014-15, inflows increased to Rs 95,994 crore in 2016-17 to a whopping Rs 2.3 lakh crore in 2017-18. The surge in inflows in 2017-18 was thanks to demonetisation, but there has nonetheless been a steady increase in inflows. Of late, though, equity inflows have tapered off sharply; August saw the smallest inflow in 18 months. The MF industry is miffed because commissions on ULIPs are heftier and, moreover, ULIPS have tax breaks that MF schemes do not. The insurance regulator may want to revisit the commissions for ULIPs.