SEBI wants to bring down the total expense ratio (TER) cap in mutual funds to 2%, said C. VR. Rajendran, CEO, AMFI at the Cafemutual IFA Event 2016 held in Mumbai recently.
As a consequence of reducing TER, Rajendran said that it may limit the commission paying capacity of AMCs. He said, “Globally, costs are coming down. If TER comes down, naturally, fund houses cannot pay the commission they are paying today. IFAs cannot increase their revenues by expecting higher commissions.”
He urged IFAs to use technology to grow volumes. “IFAs can grow business by increasing sales volume with the help of technology.”
Citing the example of banking industry, he said, “If a customer transacts through a branch office it costs Rs.45 to the bank. If the customer goes to ATM, the same cost comes down to Rs.8. Further, in case of transactions through net banking and mobile banking, the cost comes down to only Rs. 3 and Rs.10 paise respectively. Surprisingly, on every swipe at a retail store, banks get a revenue of Rs.1. This is how transaction are migrating from brick and mortar to digital. Similarly, IFAs should not rely on physical transactions as it consumes a lot of time and incurs huge costs. Leveraging technology is the way forward. If you continue to fear that technology will take away your business then you are undermining yourself. Financial products are very complicated and need proper handholding. Investors always need advisors to make the right investment decisions.”
Recently, SEBI Chief U K Sinha has reiterated that AMCs should reduce costs in order to expand the reach of mutual funds. “In asset management in India, the cost is quite high. We are one of the six countries where it is more than 2%. If we really want to expand the reach of mutual funds, then this has to be reduced,” he was quoted in Value Research magazine published in the anniversary issue of Mutual Fund Insights.
The Sumit Bose committee has also recommended that the TER charged by AMCs should come down. “Competition has not reduced costs much below the expense ratio that was fixed when the AUM of the industry was much lower,” states the Sumit Bose committee report.
“Managing cost is always a challenge. The mutual fund industry should come out with a solution to rationalize costs before intervention of the Finance Ministry,” SEBI Chairman U K Sinha is reported to have told members in the recent AMFI AGM.
The regulator has already started working in this direction. It has formed a committee headed by Nandan Nilekani, former Chairman of Unique Identification Authority of India (UIDAI) and co-founder of Infosys which has been tasked to suggest measures to reduce cost in mutual funds.
