The Securities and Exchange Board of India (Sebi) is considering offering incentives to asset management companies (AMCs) that increase their reach beyond the top cities. The move is aimed at increasing the spread and fund flows from smaller cities, where penetration is currently very low.
If a fund house is able to spread its reach and get a new set of investors into their equity schemes from Tier-II and Tier-III cities, the market regulator might allow it to charge an expense ratio of up to 50 basis points over-and-above the permitted limit, said people familiar with the development.
Following a meeting with the mutual fund advisory committee earlier this week, the regulator is also likely to increase the maximum expense that a fund can charge by 25 basis points to 2.75 per cent. An announcement in this regard is likely in the next few weeks from Sebi. Expense ratio is the percentage of an investor’s corpus that an AMC deducts annually to meet its various expenses.
| LIMITED REACH | |
| Cities | Contribution to total AUM |
| Mumbai | 42% |
| New Delhi | 13% |
| Bangalore | 6% |
| Chennai | 5% |
| Kolkata | 5% |
| Total | 71% |
| Data as on March 31, 2012 Source: Amfi | |
Charging higher expense ratio will allow fund houses to spend more on distributors and take initiatives to increase penetration. Fund houses are often criticised for not reaching out to the hinterland and only focusing on the top-tier cities. At present, the top five cities — Mumbai, New Delhi, Bangalore, Chennai and Kolkata — account for more than 70 per cent of the industry’s assets.
The regulator is also planning to reduce the fees mutual fund distributors have to pay to the industry body Association of Mutual Funds in India (Amfi) for obtaining a registration number. Currently, a distributor has to fork out Rs 5,000 to register as an intermediary with Amfi and get an ARN (Amfi Registration Number).
Sebi is likely to direct Amfi to bring down the registration fee substantially, said people with knowledge of the development. The sum charged for obtaining an ARN is not high but it was still preventing small distributors from enrolling, said industry players.
The move will help people from smaller cities enroll as mutual fund distributors.
Sebi may informally ask fund houses to conduct education camps in smaller cities to help people understand financial products. This will also help in increasing the investor penetration, currently languishing at just three per cent of the population. Currently, equity funds can charge an expense ratio of between 1.75 per cent and 2.5 per cent of the scheme’s net assets in a year. The ratio comes down as the fund size gets bigger. The 2.5 per cent expense ratio can be charged only for the first Rs 100 crore of assets and it drops by 25 basis points for every Rs 300 crore.
Post-abolition of entry load, expense ratio is becoming critical as it is the only charge, apart from exit load in some cases, that an AMC gets to levy.
