A mid-sized fund house has advised its distributors to go for AUM Transfer Plan (ATP). ATP is transferring of assets to other funds to keep earnings intact post rationalisation of TER.
A note sent by this mid-sized fund house to select distributors states that the overall expense ratio of funds having AUM of Rs.10,000 crore or more will be in the range of 1.43% to 1.70% with effect from April 2019. This will result in reduction in brokerage structure of distributors. In fact, there could be a reduction of at least 0.25-0.30% on brokerage, said the fund house.
Currently, large schemes offer trail commission in the range of 0.75%-1.35% depending on the volume of business. With rationalization in TER, the trail commission offered on such schemes is likely to be in the range of 0.50%-1%.
The fund house has suggested that in order to keep their earnings intact, distributors should look at transferring a portion of their assets in performing schemes having AUM of less than Rs.500 crore as such a scheme can continue to offer trail commission 1.30% to 1.50%.
Here is an extract from the fund house’s communication outlining three scenarios:
The above illustration indicates that distributors having AUM of Rs.200 crore may have to face shortfall of Rs.60 lakh a year if they continue with the large sized schemes. The fund house said that if a distributor transfers his entire AUM to smaller schemes, his annual revenue would grow to Rs.3 crore. Even if the distributor switches 25% of the AUM i.e. Rs.50 crore, his annual income will be Rs.75 lakh more than Rs.1.80 crore, said the fund house.
A senior official from this mid-sized fund house told Cafemutual on condition of anonymity that this will help distributors cushion the impact of rationalization of TER on their earnings. “In my view, distributors should consider transferring a portion of their AUA to small sized performing funds to keep their earnings intact. In fact, SEBI has also expressed its concern over increasing concentration risk in the mutual fund industry. The fact is that the top seven AMCs currently manage 70% of industry AUM. These AMCs account for 60% of entire industry’s revenue. There needs to be healthy competition for the widespread growth of the industry,” he said.