On December 13, SEBI announced TER slabs based on AUM of the scheme from April 1, 2019. The market regulator has capped TER at 2.25% in equity funds and 2% in other than equity funds.
We spoke to a few industry experts to understand the impact on TER rationalisation on the mutual funds industry.
Milind Barve, MD and CEO, HDFC Mutual Fund said that the move would impact earnings of both fund houses and distributors.
Dhruv Mehta, Chairman, Foundation of Independence Financial Advisor (FIFA) feels that distributors with small AUM would find it difficult to survive. “Imagine a situation when your boss told you that he will deduct your salary by 25% despite your hard work. You would look out for a new job, right. Similarly, distributors with small AUM may not find this profession lucrative. Large distributors will obviously find other ways and look at shifting to other products.”
Mehta also feels that rationalization in TER would affect B30 penetration. “Most investors in B30 require handholding by distributors. These investors will stay away from mutual funds if they do not find anyone who can help them with financial advice.”
Swarup Mohanty, CEO, Mirae Asset said that rationalization in TER would lead to a shift towards fee based advisory business. “Large distributors have started moving on from commission led distribution model to fee based model. In fact, most of them have set up fee based advisory services.”
Talking about rationalisation of costs, Mohanty believes that every industry has to reduce costs to survive. Citing an example of smart phones and cars, he said, “Six years ago, I bought a mid-variant of a car worth Rs.9.60 lakh. Today, I have bought a new car at Rs.9.40 lakh with more powerful features and automatic transmission. Normally, one would assume that sheer inflation would lead to a rise in the cost of the car. However, thanks to rising volumes and increasing competition in the automobile industry, we are getting such a car at reduced prices. Another example is iPad. Its cost has reduced from Rs.35,000 to Rs.29,000 now. However, both automobile industry and dealers have witnessed growth in their business over the years due to increase in volume. Though AMCs and mutual fund distributors would take time to readjust to the new norms, I strongly believe that we will all prosper.”
NS Venkatesh, AMFI Chairman feels that the move will help the industry attract more investors. “Rationalization of TER is a positive move for the industry. It is good for the investors and the mutual funds industry will now become more attractive for investors. I am confident that the industry will add millions of investors going forward,” he said.
Here is the impact of TER rationalisation on stakeholders of the mutual funds industry.
Investors: Positive. Cost of owning a fund will go down for them and returns will improve.
Distributors: Most research houses such as Citi India and CLSA said that that the impact would be more acute on distributors. In fact, they have estimated that the earnings of distributors to reduce by 15 to 20 bps. However, the difference between regular and direct plan will reduce substantially.
AMCs: Another likely impact of the circular is shift of incremental inflows to small size funds. A senior official of a large fund house feels that banks and IFAs will shift to small size funds as such funds can offer more remunerative commission.
On the other hand, large sized funds cannot charge much. There will be impact on earnings. Just like revenue per customer has come down for telecom operators, AMCs will have to face a similar situation in the mutual fund industry.
