Foundation of Independent Financial Advisor (FIFA) has urged AMCs to absorb the cost of reduction in TER.
In an email sent to Cafemutual, FIFA said that SEBI believes that the benefits of economies of scale must be passed on to the investors based on the perception that the growth of the mutual fund industry has reached a level where economies of scale are available.
Dhruv Mehta, Chairman, FIFA believes that AMCs should absorb TER cut as they get benefits of economies of scale. “Even if a fund size grows from say Rs.5,000 crore to Rs.10,000 crore, the cost that an AMC incurred on fund management remains unchanged (fixed cost). However, if a distributor brings new business, there is variable cost attached to it. In fact, the more clients you acquire, the more money you spend on such acquisitions. Clearly, the benefits of economies of scale goes to AMCs and hence, they should bear this cost.”
Further, FIFA said that their discussions with the government gave them understanding that the cut in TER was not a step to cut distributor commissions.
FIFA believes that any intended cut in the distributor commissions would be counter-productive for the industry.
Here is the copy of the letter.
This refers to the SEBI (Mutual Funds) ( Fourth Amendment) Regulations 2018 which, with effect from 1st April 2019, reduces the limits of the Total Expense Ratio ( TER) of the various Mutual Fund schemes.
We note that the reduction in the limits of TER w.e.f 1.4.2019 was stipulated by SEBI based on the perception that the growth of the mutual fund industry has reached a level where economies of scale are available and the benefits thereof must be passed on to the investors.
While moving these proposals SEBI observed that the benefits of such economies in debt funds have largely been implemented due to the fact that the predominant subscription of debt schemes are by corporates and institutional investors, who due to their sheer size, are in a better bargaining position. However, as far as equity schemes are concerned, where the predominant investor base is retail, such benefits of economies of scale have not been passed on to the investor.
During discussions with members of the distribution community, post the announcement of the proposal, the Regulator informed that the objective of such a reduction in TER with effect from April 1 2019, was to get the mutual funds/AMCS to pass on the benefits of economies of scale to the investors.
In our discussions with the Government on this subject, we were given to understand that the cut in TER was not a step to cut distributor commissions.
The benefit of economics of scale on account of the growth of the size of the industry or the growth of the assets under management may accrue to the Asset Management Companies as the cost of Investment Management does not increase in the same proportion as the growth in the assets under management, given the vast distribution network at its disposal.
However, as far as the distribution community is concerned, similar economies of scale at the distributor level has not been reached given that the coverage and scope of the individual distributors is very limited. Thus, the benefit of economies of scale being only available to the asset management companies/ mutual funds the reduction in TER is not expected to be passed on to the distributors by reducing the commissions paid.
We therefore trust that there would be no reduction in the distributor’s commission arising from the implementation of the revised TER. Any intended cut in the distributor commissions would be counter-productive, against the objective of promoting the growth of mutual fund industry and not in consonance with the rationalisation behind the reduction in TER.
The distribution community looks forward to working closely with all stakeholders to achieve the goals of financial inclusion and financial independence of the citizens of our country.
