The Sebi’s crackdown on mutual fund (MF) expenses in late May to expand fund penetration across India has reportedly prompted many asset management companies (AMCs) to cut the commissions paid to distributors. The market regulator’s decision looks justified considering that gross commission payouts by top AMCs had increased 52-85 per cent in FY18. On a two-year compound annual growth rate (CAGR) basis the increase in payout—which also includes the amount expensed within MF schemes—was 31-91 per cent.
This huge increase in expenses coincided with the windfall increase in total flows into equity mutual funds over the past two years.
A research report released by JM Financial on Thursday says even though the total expense ratio, or TER—which total cost of the fund divided by the fund's total assets—has contracted across equity MF schemes over the past five years, commission payouts as a percentage of AUM have only increased. As a result, commission payouts have outpaced the rate of growth of equity mutual fund AUM as well as the topline growth of AMCs.
Based on a study done on ‘marquee schemes’ of five AMCs—of ICICI Pru, Reliance Nippon (RNAM), SBI, Birla Sun Life and UTI—the brokerage says gross distributor payouts had been on the rise between FY2014 and FY2018. Commissions, incidentally, are the single largest expense for an AMC. On a gross basis, the report says, “the rate of growth of gross commission received by top distributors exceeds the growth rate of revenues of AMCs over FY14-18. While commissions received by top distributors had grown at 41 per cent CAGR over FY14-18, revenues for some of the top AMCs had grown at a CAGR of 24-36 per cent. This does, to an extent, explain the compression in revenue yields that has been witnessed by AMCs in the recent past.
It is also observed that commissions are strongly correlated with the market share of a mutual fund, so AMCs had to shell out higher commissions to maintain or improve their market shares. “Although commissions as a percentage of average MF AUM has increased across the board, those AMCs which have been more generous in commission payouts have been able to increase their market shares. While commissions/average AUM increased by 5-10 basis points for RNAM and UTI AMC over FY16-18, they also witnessed a reduction in market share. On the other hand this ratio has increased by 19-28bps for ICICI Pru, SBI AMC and Birla SL, which has corresponded with their gains in market share”, says the report.
It says most top AMCs (except SBI, UTI AMC) carry significant ‘prepaid expenses’ as an asset on the balance sheet, which could primarily be commissions. “As of FY17, this number as a percentage of profit before tax has reduced materially across AMCs, however, we await the FY18 financials of these AMCs to confirm this trend.”
However, experts say, going forward, the expense ratio could come down for AMCs as the Sebi has, in a notification on May 29, slashed the ‘additional expense’ charged by MFs from 20 basis points to 5 bps.
Before that mutual funds were allowed to charge additional expenses of up to 0.20 per cent, or 20 basis points, of the daily net assets of MF schemes, in lieu of the exit load credited to the scheme.
After the May notification, many AMCs have cut their trail commission, thereby bringing down their costs.
Trail commission, which is paid by a fund house to distributors, is paid every year to the distributor until the investment is withdrawn by an investor.
Currently, India has 42 mutual fund houses managing assets to the tune of over Rs 23 lakh crore.