Over the last few days, there has been a lot of talk about the impact of the SEBI circular banning upfront commission and enforcing a compulsory shift towards all trail model. Though it is difficult to predict the long-term impact of the move, going by the first indications, the short-term impact is not in favour of the industry.
The latest CAMS data that covers 86% of industry shows that the mutual fund industry has witnessed a decline of approximately 43% in equity gross sales in November.
While the industry has seen a decline across all distribution channels, it is steeper at banks - 53%and private client groups (PCG) - 56%. Banks and PCGs were far more dependent on upfront commissions than IFAS. NDs and IFAs recorded decline of 37% and 40% respectively in terms of gross equity sales.
This trend has raised key questions for the industry: Is this decline structural or transient; and is the distribution landscape changing in favour of structured products like AIFs, PMS and other competitive products like ULIPs and NCDs?
A CEO of a large fund house requesting anonymity believes that the decline is temporary. “Retail equity AUM will grow despite competition from other products. However, distributors servicing HNI clients who are dependent largely on upfront commission may no longer continue to offer mutual funds.”
Srikanth Meenakshi, COO, FundsIndia looks at it differently. He said, “While I agree that ban on upfront commission has affected the industry growth structurally in part, the decline in November gross equity sales is also due to festival season. There were only 19 business days in November. Also, many investors are in wait and watch mood due to elections.”
Meenakshi further said that HNI money is moving to structured products while conservative retail investors have started looking at fixed income products such as NCDs and bank FDs as yields have become lucrative. However, middle class and upper middle class would continue to invest in mutual funds through SIPs, he added.
A Balasubramanian, CEO, Aditya Birla Sun Life Mutual Fund feels that industry would continue to grow. “I agree that the industry has been witnessing a decline in terms of equity gross sales but it will be short term. Once the dust settles down, the industry will continue to attract inflows from retail investors through strong SIP flows despite upfront commission ban.”
Seconding his view, Neeraj Choksi, Co-Founder, NJ India said that decline in equity gross sales is largely due to IL&FS fiasco and it has nothing to do with ban on upfront commission. “Though a fraction of HNI money has started moving to structured products, retail investors would continue to put faith on mutual funds through SIPs.”
Hemant Rustagi of WiseInvest Advisors feels that this decline has nothing to do with brokerage structure. “A distributor puts a lot of efforts to acquire a new client. A distributor meets his prospects several times before converting him into client. A mere change in commission structure may not affect such efforts. Also, most large IFAs have been following all trail model for years and nothing has changed for them. It is too early to ascertain the impact of ban on trail commission but in my view, change in upfront commission would be disruptive for banks and budding distributors.”
On shifting towards structured products, Rustagi said, “Structural products are complex in nature. Even HNIs do not understand such products. I don’t think there will be shift to other products post ban on upfront commission as mutual funds are far superior products in terms of transparency, liquidity and performance.”
Going by the initial trends, the ban on upfront commission may shift distributors servicing large clients to other financial products such as PMS, AIFs and ULIPs but distributors catering to retail investors would continue to offer mutual funds.
Gross equity flows (Figures in Rs.crore)
Distributor type |
April |
May |
June |
July |
Aug |
Sept |
Oct |
Nov |
Average gross sales till September |
Fall in October |
Fall in November |
Bank |
7198 |
7925 |
6044 |
6292 |
10381 |
6558 |
5886 |
3499 |
7400 |
-20% |
-53% |
Direct |
3337 |
3866 |
3020 |
2750 |
3460 |
3316 |
4103 |
2180 |
3291 |
25% |
-34% |
IFA |
4266 |
4203 |
3497 |
3250 |
4036 |
3795 |
4166 |
2286 |
3841 |
8% |
-40% |
Institution |
124 |
138 |
104 |
135 |
193 |
111 |
102 |
54 |
134 |
-24% |
-60% |
ND |
5161 |
5114 |
4140 |
4044 |
4988 |
5127 |
3974 |
2997 |
4762 |
-17% |
-37% |
Others |
921 |
848 |
666 |
780 |
930 |
946 |
780 |
585 |
848 |
-8% |
-31% |
PCG |
796 |
960 |
634 |
550 |
740 |
572 |
534 |
310 |
709 |
-25% |
-56% |
Grand Total |
21802 |
23054 |
18104 |
17802 |
24739 |
20425 |
19545 |
11910 |
20986 |
-7% |
-43% |