The proposed overhaul of the total expense ratio (TER) charged by mutual funds (MFs) could deal a bigger blow to MF revenues than what the Securities and Exchange Board of India (Sebi) has forecasted, a prominent MF distributors' association has cautioned.
The Foundation of Independent Financial Advisors (FIFA) sees the industry's revenues from regular plan equity-oriented funds falling 11 per cent as compared to Sebi's estimate of a 5 per cent decline in revenues from across schemes and plans.
In a consultation paper released last month, the regulator had proposed sweeping changes in the way and the amount MFs charge investors. Sebi is expected to take the proposal up at its board meeting next week.
Going by past instances of TER cuts by Sebi, it is expected that MFs will pass on the impact on their revenues to distributors, to some extent, leading to a decline in commission payouts.
Delhi-based All Mutual Fund Distributors Welfare Association (AMDwA) has called upon Sebi to ensure that the MF distribution business remains financially viable.
"Economies of scales do not work for MFDs as the business involves human touch. Safeguards should be created and no room be left for AMCs (asset management companies) to manipulate MFDs’ commissions to manage overall TER," the association has stated in its letter to Sebi.
In their recommendations to Sebi on the TER consultation paper, FIFA has argued that though debt and passive schemes will largely be immune to the changes, the industry may still find it difficult to manage these schemes if the proposed structure is brought into effect in its current form.
"Distributors also argued that equity-oriented schemes comprise 50 per cent of the total AUM, but generate 84 per cent of the total revenue. Any further reduction in the TER limits for equity-oriented schemes will have a significant impact on the revenue and profitability of the entire industry and would also impact the viability of running other category schemes at low cost," Kotak Institutional Securities said in a report citing FIFA's response to Sebi.
The association has also conveyed that a shift from scheme-based TER structure to the one based on AMC-level assets will scuttle innovation in the MF space.
Currently, MFs charge according to the size of the scheme. Newer schemes charge more as their asset size is smaller. Sebi now plans to link the expense cap to the overall assets managed by the fund house. In such a scenario, larger AMCs will not be able to charge as much as they do now for new launches.
In its response, FIFA has also highlighted that the benefits of economies of scale are already being passed on to investors. It said that the weighted average TER of equity funds has declined by 21 per cent between 2018 and 2022. In the case of debt funds, the average TER is down 25 per cent, the association said.