Mutual fund houses are looking at all possible ways to reduce costs. As the latest measure, they have started negotiating with their empanelled brokers on the quantum of brokerage to be paid for every trade. Larger fund houses have already slashed the brokerage to rein in overhead costs and falling margins in a weak market.
According to institutional traders, some top fund houses reduced the brokerage by up to 25 per cent in the recent past. A large domestic fund entity backed by a leading corporate house is believed to have slashed the same from 15 basis points (bps) to 10 bps for its largest broker. Another fund house — a joint venture between an Indian and a foreign entity — has brought it from 20 bps to 15 bps.
While market participants say the trend is a direct outcome of weak market sentiment and falling volumes, which have pushed up the cost of trading, technology advancement in the form of direct market access (DMA) has also acted as a catalyst.
“Currently, the trend is limited to some large fund houses, but it can become an industry phenomena,” said an institutional dealer who trades on behalf of some domestic fund houses. “While a 25 per cent cut in brokerage has become common, some fund houses have also started giving single-digit commission to the smaller brokerages on their panel,” he added.
Meanwhile, fund house officials say they regularly negotiate the brokerage with their panel, depending on the quantum of trades routed through various brokerages. Incidentally, the move comes close on the heels of many fund houses cutting down on the number of empanelled brokerages.
“We keep negotiating and try to keep the brokerages at a minimum,” said Ajit Menon, executive vice-president & head of sales, DSP BlackRock. In a similar context, an official from Religare Mutual Fund said “it is an ongoing process of negotiating on brokerages as a part of prudent management.”
An official from one of the largest domestic fund houses said the increased acceptance of DMA among MFs had contributed to the fall in brokerage, as that involved minimal or no efforts at the broker’s end. “The broker has absolutely no role to play when orders are routed through DMA, so the question of high brokerage does not emerge,” said the sales head of a domestic fund house.
“Many fund houses have adopted it, as it lowers the impact cost. So, the average brokerage is witnessing a fall,” he added.
DMA is a facility which allows brokers to offer clients direct access to the exchange trading system through the broker’s infrastructure, without manual intervention by the broker. The Securities and Exchange Board of India also encourages DMA, as it reduces the probability of front-running activities.
