Thursday, July 9, 2020

Payments to Mutual Fund Distributors at lower levels in 2019-20

Mutual fund distributors are facing a decline in their income and the gross amount paid to them by the fund house declined to a three-year low of Rs 6,134 crore in 2019-20. This earned him Rs 7,938 crore last year, which means that his income was hurt by about 22 percent.

Market participants attributed several reasons to this. Shrikant Matrubhai, Chief Executive Officer, Srikavi Wealth said, fund houses are controlling the cost by making the commission structure suitable. 

As fund houses are listed, commissions may fall further as mutual funds would like to reduce their costs further.

Direndra Kumar, Founder and CEO of Value Research, said, "There is an inclination towards direct plans or channels and the value of assets is also affected amid the market downturn."

Direct plan assets accounted for 47 per cent of the industry's total assets in May. In the past, market regulator SEBI has tried to encourage the increase in direct plans.

In a direct plan, the investors do not make any sense to the distributor and save on their total expense ratio as the distributors' commission is tied to the total expense ratio.

Larger distributors have also seen reductions in receipts. In the case of Axis Bank, the gross payment declined to Rs 415 crore and it received 25 per cent less than last year.

 State Bank of India received 23 per cent less (Rs 374.9 crore) payments. HDFC Bank has reported a 40 per cent (Rs 294 crore) injury, while ICICI Bank has reported 47 per cent (Rs 185.64 crore).

In terms of commission, the country's largest distributor NJ India Invest has seen a three per cent reduction in payments in FY 2020. Market participants said that regulatory changes have also created barriers to mutual funds' ability to encourage distributors. 

The new rules clearly state that the expenses related to the schemes need to be borne by the same scheme.Previously, the fund houses could record the expenses related to the scheme, such as distribution costs in their accounts, rather than recovering it from the same scheme. Also, the payment of advance commission in mutual funds has been stopped from October 2018.

The softening of equity investment has also contributed to this decrease. Investment of Rs 83,787 crore in equity schemes in FY 2020, which is 25 per cent lower than Rs 1.1 lakh crore a year ago.

The weakness in the market concept has led to more investment withdrawals and hurt valuations and ultimately reduced the size of assets being handled by distributors.

The BSE Sensex broke over 20 per cent in FY 2020, while it had a strong jump in the last financial year.

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