Non-bank fund houses forge ties with distributors to gain market share

Such tie-ups to help fund houses compete with MFs that have their own bank channels

Non-bank fund houses are looking to enter into special arrangements with distributors to expand their asset base. Recently, Essel Mutual Fund (MF) gave a token stake in its business to NJ India Invest -- country's largest distributor in terms of commissions. In July, Reliance MF and Vankrangee entered into a tie-up to distribute the former's mutual fund products in under-served areas.

According to experts, in an industry dominated by fund houses that are backed by large banks, such tie-ups can help in improving the competitive landscape. More than 60 per cent of the assets managed by top-five fund houses belong to bank-backed fund houses. The top-five fund houses dominate the industry with over a 50 per cent market share in the industry.  

Banks are not only leading the charts when it comes to the fund management business but also in the distribution business. Data available with Association of Mutual Funds in India (Amfi) shows that banks earned Rs 35 billion in distribution commissions in FY18. This accounted for more than 40 per cent of the total commissions that were paid out by the MF industry in FY18.

The linkage between asset sizes and bank-backing gets more clear from the distributor commissions fund houses pay to their bank sponsors. An analysis of the data put out by Value Research showed on an average 47 per cent of all the commissions paid out by the nine bank-backed fund houses in FY18 went to their bank sponsors.  

The market regulator Securities and Exchange Board of India (Sebi) is concerned over the lack of competition in the MF industry and wants the situation to improve. “It is a major cause for concern that despite such tremendous growth, a majority of the market share of the industry remains concentrated with a few big players,” said Ajay Tyagi, chairman, Sebi at the Amfi Mutual Fund Summit 2018.

Experts say fund houses that don’t have the presence of a banking channel within their own group firms will have to think differently to scale up their business.

“Distributors have played a key role in the growth of the industry. The relationship needs to evolve and go beyond commissions. We want to treat distributors as partners in growth. The stake was offered to NJ India at a fair value. We are hoping that more people will come on board,” said Rajiv Shashtri, chief executive officer of Essel MF.  

In July, Vakgrangee disclosed that it had entered into an alliance with Reliance MF. “As per the arrangement with Reliance MF, Vakrangee through its Nextgen Vakrangee Kendras will offer mutual fund distribution and help Reliance MF to extend their reach to un-served and under-served areas,” the exchange disclosure said.

According to people in the know, Reliance MF has also entered into a tie-up with Suvidha Infoserv recently. Sources suggest that four-five similar tie-ups are in the works.

Sebi recently decided to do away with upfront distributor commissions. Experts believe that removal of an upfront commission will also nudge more distributors to shift their focus towards scheme’s performance and look beyond commissions. At the same time, there is a debate on whether there is a need for rationalising distributor commissions now when there is still a lack of distributors in the MF industry.