MF sales may dip as regulatory changes choke distributor commissions

Experts say distributors might re-look at viability of selling MF products in light of new changes

The surge in commissions generated from mutual fund (MF) distribution in previous years is showings signs of waning following the changes in commission and fee structure brought about by the Securities and Exchange Board of India (Sebi).

In 2018-2019, MFs’ payouts to distributors through commissions and other distribution-related expenses dropped seven per cent to Rs 7,938 crore, according to data collated by the Association of Mutual Funds in India. These distributors accounted for Rs 2 trillion worth of assets managed by the MF industry in 2018-2019.

Experts say apart from the regulatory changes, market volatility has also contributed to the drop in distribution income.

“In October last year, Sebi decided to get rid of the practice of upfronting of distributor commissions. Around the same time, equity flows started to come under the pressure as market volatility heightened following the IL&FS crisis,” said Sunil Subramaniam, managing director of Sundaram AMC.

Subramanian added that reversal of 20 basis points of additional expense -- that MFs were allowed to charge in place of exit load -- also had an impact on MFs’ ability to incentivise distributors.

Among the top distributors, Kotak Mahindra Bank, State Bank of India, ICICI Bank and HDFC Bank, saw between 7-24 per cent fall in commissions in 2018-2019.

According to industry experts, some of the distributors -- especially the smaller ones -- might re-look at the viability of continuing with MF distribution in light of the recent changes.

“The regulatory changes, including the reduction in overall total expense ratio (TER), can lead to some consolidation as some distributors may not find it conducive to continue. However, the larger ones should be able to deal with these changes,” said Kaustubh Belapurkar, director (fund research), Morningstar.

The revised TER laid down by Sebi has come into force from April 1, 2019. With the aim of improving competition in the 44-player MF industry, Sebi stipulated lower TER for larger-sized schemes and higher TER for smaller schemes. However, the overall TER ceiling has been brought down by 25 basis points. MF officials have said that distributors will also have to bear the impact of the TER cuts.  

Experts add that the reason banks have seen sharp reduction in distribution income, is due to their orientation towards upfront commissions.

“Around 70-75 per cent of the banks were aligned with the upfront commission model and accordingly had incentive structures for internal sales team,” said chief executive of a fund house, requesting anonymity.

NJ IndiaInvest, which is the only non-bank distributor in the top-five, gained the largest chunk of payouts in 2018-2019. At Rs 807 crore, it was a marginal growth of three per cent over previous financial year.

Between the financial years – 2016 and 2018 – the MF distributors had seen sharp uptick in their commissions. MF payouts to distributors rose from Rs 3,657 crore to Rs 8,549 crore, jumping more than two-times during this period.

Experts believe if equity flows start to recover, the commissions can also see pick-up. “Equity schemes offer higher margins, so money coming into these schemes will benefit all the stakeholders,” Belapurkar added.

Between November 2018 and February 2019, equity schemes had seen four back-to-back months of slowdown in flows. After seeing a bounce back in March, equity flows again slipped 60 per cent in the following month.

However, analysts say that flows could improve following the decisive victory of the BJP-led government in the recent elections.

In May, which was the month in which election results were announced, equity flows jumped 17 per cent to Rs 5,407 crore.