The higher expense could be used to incentivise distributors who get applications beyond the top 15 cities.
Fund houses could get to charge expenses up to 1%, subject to an upper ceiling, from the proposed hike in total expense ratio. According to sources, the Mutual Fund Advisory Committee has suggested SEBI to allow AMCs to incentivise distributors who get applications beyond the top 15 cities in order to increase the penetration of mutual funds.
Fund houses say that if this proposal is accepted by SEBI they could hike the trail commission. “We would like the incentive to be back-ended than front-ended. Offering a higher upfront commission on applications from beyond top 15 cities could fire back if the investment flows out before one year. We have to wait for the exact slabs. I think SEBI is in agreement with this particular proposal,” says a sales head of a domestic fund house.
A large scheme usually charges less expense as compared to a small scheme with less assets under management. Currently fund houses are permitted to charge 2.50% for the first Rs 100 crore, 2.25 % for the next Rs 300 crore, 2.00 % for the next Rs 300 crore and 1.75% is allowed for assets beyond Rs. 700 crore. Some officials are of the view that SEBI may not hike the total expense ratio but could allow them to charge 2.50% even for the next Rs 300 crore garnered in a scheme.
SEBI chief U K Sinha has been stressing on the need to increase MF penetration in smaller towns. The top five cities currently account for 74% of the industry AUM, out of which Mumbai alone accounts for 44% share. The top 15 cities account for 87% of industry’s assets and the rest 13% accounts for the next 95 cities/towns.
Operational hurdles
Fund houses could face challenges in identifying which applications are coming from smaller towns. “There could be a possibility of distributors registered in Mumbai channelizing applications by mentioning other addresses,” says a senior official from a bank sponsored fund house.
“It a good move but there could be some operational issues for implementing it,” says a marketing head of a public sector fund house.
