About 90% of Retail MF Investors is channelised through Distributors.

Almost 90% of investments in equity schemes and 55% in debt schemes are through distributors.

Market requlator SEBI plans to curb high commissions that fund houses pay brokers.

The cost of investing in mutual funds (MFs) is likely to come down with the capital market regulator SEBI planning to curb high commissions that fund houses pay brokers.

At present mutual funds can spend a maximum 2.5 per cent of the asset under management (AUM) -an expense they recover from investors over time.

The regulator SEBI is now exploring ways to cap total expense & stagger the payout to brokers and distributors who bring in business. SEBI believes it's time to lower the 2.5% cap which has prevailed for close to 20 years during when the industry's AUM has surged.

The mutual fund advisory committee of SEBI met on Monday to discuss the subject of high commissions paid by fund houses amid concerns of possible mis-selling & portfolio churning, said a person aware of the deliberations.

The committee has recommended that the total expense ceiling should be reduced to 1.5% of daily net assets in case of equity-oriented schemes.

It also suggested that total expenses that can be charged in close-ended schemes be capped at 1.5%, with an extra 0.3% for inflows from beyond the top-15 cities.

Total expense ratio includes fund management fee, registrar & transfer agent fees, and expenses such as brokerage and fund accounting costs.

“If a scheme generates a return of 22.5% on a gross basis, investors get an appreciation of 20% because the fund house takes 2.5% as expenses. If the total expense ratio is pegged at 1.5%, the cost of investing in mutual funds will come down by 1% for investors“ said a senior fund official.

“A lower expense structure is better from an investor perspective. But,  for the mutual fund industry the entire dynamics will change,“ said Raghvendra Nath, MD of Ladderup Wealth Management. “

A distributor in tier-II or /  tier-III cities may not find it appealing to sell the mutual fund product any more.“

According to Mr. Raghvendra Nath, MD, Ladderup Wealth Management, “At present, only few fund houses are profitable & reducing the expense ratio will put a question mark on the future of the industry.“

SEBI may also mandate higher disclosures in terms of commissions paid by a scheme. Mutaul fund houses may have to mandatorily disclose in all their offer documents the commission payable as a percentage of AUM by a scheme in a year.

Besides, fund houses as well as the industry lobby Association of Mutual Funds of India (AMFI) will have to disclose on their websites the commissions paid annually.

Distributors too will have to spell out in the application form the commission that is charged to investors. SEBI is examining a new rule introduce the `tied-agent' model where a distributor would be allowed to sell schemes of only one fund house for the first few years.

As per the current practice, fund houses pay upfront commissions from their coffers &  then recover the trail fees through the annual charges that they levy on schemes. The Indian mutual fund industry manages assets worth Rs. 10.67 lakh crore, of which 67% is mobilised by distributors & brokers while the balance 33% is direct investments.

Almost 90% of investments in equity schemes and 55% in debt schemes are through distributors.

Close to 90% of the AUM of  above Rs. 2 lakh core from retail investors is channelised through distributors.

Src: ET

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