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Focussed funds and multi cap funds can offer healthy commission to MFDs, shows an analysis of average distributable TER. Both focussed funds and multi cap funds have distributable TER of 1.32%.
Distributable TER is the difference between regular plan TER and direct plan TER. The analysis was done based on KFintech data on TER as on September 2022.
While mutual funds are not bound to pay the entire distributable TER as commission, the payout is generally close to the difference in expense ratio of regular and direct plans. It also depends on volume of business generated by a distributor.
In focused funds, the average expense ratio is 2.21% in regular schemes and 0.86% in direct plan, resulting in distributable TER of 1.32% in the hands of fund houses. Similarly, the average expense ratio is 2% in regular plan of multi cap fund and 0.68% in direct plan.
Other schemes where the distributable commission is in excess of 1% are midcap funds, smallcap funds, value funds, large & midcap funds, aggressive hybrid funds and largecap funds.
Among equity funds, ELSS has the lowest distributable TER.
In debt category, dynamic bond funds and credit risk fund offer highest distributable TER of 0.72% and 0.63%, respectively.
Banking and PSU funds occupied the lowest spot in the list with a commission potential of 0.38%. Overall, the MF industry has leeway to pay commission of up 0.96% on an average.
Let us look at the table:
|
Scheme category |
Average TER - Regular |
Average TER - Direct |
Distributable TER |
|
Focused fund |
2.18 |
0.86 |
1.32 |
|
Multi-cap fund |
2 |
0.68 |
1.32 |
|
Mid-cap fund |
2.11 |
0.87 |
1.24 |
|
Large- and mid-cap fund |
2.14 |
0.91 |
1.23 |
|
Small-cap fund |
1.97 |
0.75 |
1.22 |
|
Aggressive hybrid fund |
2.14 |
0.94 |
1.2 |
|
Large cap fund |
2.2 |
1.05 |
1.15 |
|
Value / contra fund |
2.18 |
1.09 |
1.09 |
|
ELSS |
2.02 |
1.07 |
0.95 |
|
Conservative hybrid fund |
1.77 |
0.88 |
0.89 |
|
Dynamic bond fund |
1.29 |
0.57 |
0.72 |
|
Arbitrage fund |
1.03 |
0.37 |
0.66 |
|
Credit risk fund |
1.39 |
0.76 |
0.63 |
|
Corporate bond fund |
0.7 |
0.3 |
0.4 |
|
Banking and PSU fund |
0.68 |
0.3 |
0.38 |
|
Industry average |
1.72 |
0.76 |
0.96 |
Commenting on the expense ratio of Indian markets, KFintech IPO prospectus said that India does not have high TER compared to other countries. It said, “As per CRISIL MI&A, India follows a bundled expense ratio structure wherein various commission expenses are embedded in the expense ratios of the funds. Other than these expenses, the investors do not bear any additional cost such as platform fees or advisory fees. Funds in India are not allowed to charge performance fees. Thus, in direct comparison, the expense ratios may appear higher but they are bundled and have no other costs attached. Mostly, retail investors invest in actively managed funds and passive flows are from institutional investors. Thus, the Indian market, though small, is a fast-growing one. The market comprises high retail participation unlike global peers where larger institutions are the major investors in funds.”
