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A report released by Kotak Institutional Equities reveals that lower commission doesn’t necessarily translate into churning of investment portfolio by distributors.
In fact, the industry shows that distributors do not prefer churning portfolio to earn an additional commission of 30-35 bps.
The report reveals that despite giving lower commission compared to other schemes, funds which have performed well have seen a rise in inflows from distributors. The report said, “AUM share of all funds above Rs.50 bn has increased over the last three years. This is despite almost 4:1 ratio in terms of increased availability of smaller funds which on average pay ~30 bps higher distribution commission. Similarly, the same analysis for funds over Rs100 bn size. For larger funds as well we see rise in AUM share despite almost ~35 bps lower commission rate. Both indicate that despite lower commission rates, distributors are not able to (or do not prefer to) completely churn the back book for various reasons.”
The report says that distributors look at past fund performance, brand recall and its perception among investors to pick funds. It also says that distributors also look at continuous education, on ground reach and support provided by AMCs to shortlist schemes for their clients.
Talking about impact of the proposed TER regulations, the company said, “We believe the impact of TER regulations should be seen in terms of (1) existing stock of AUM, which is much better-protected against commission differences and (2) incremental flows, which are as much influenced by performance as by distribution payout, if not more.”
Further, the report said, “Distribution commission is just one of the factors that drive flows. In our view, its influence is likely much lower on the existing stock of assets due to an existing steady trail fee, which is built over years.”
