The Rs 6.92 trillion Indian mutual funds (MFs) industry along with many of its distributors are crying hoarse about slowing sales and a fall in assets, but many of the top distributors appear to be enjoying a good run. At least that is what appears if you look at the earnings of some of the highest grossing distributors in terms of MF commissions earned.
Data released by the Association of Mutual Funds of India (Amfi), the MF industry’s trade body, shows that MF distributors have earned about 4% more commission in the fiscal 2011-12 compared with earnings in the previous year.
Note that Amfi discloses commissions of 269 distributors that meet any of the four criteria—they have to be present in at least 20 locations or they should be managing assets worth at least Rs 100 crore or they should have received commissions worth at least Rs 1 crore across all MFs put together or above Rs 50 lakh from a single fund house. As per guidelines laid out by the capital markets regulator, the Securities and Exchange Board of India (Sebi), it is mandatory for fund houses to disclose commissions it pays to these distributors on their websites. Additionally, Amfi is supposed to collate this data and present a cumulative picture on its own website.
Equity funds earn more...
India’s highest earning MF distributor by way of commission continues to be Hong Kong and Shanghai Banking Corp. Ltd. The top 20 distributors took home about 63% of commissions paid out in 2011-12, up from 57% a year back. As is widely-known, the largest distributors in the country continue to be banks and national distributors. Seven of the top 10 distributors by way of commissions are banks.
Some distributors’ commissions have gained significantly. For instance, ICICI Bank Ltd earned a commission of about Rs 54 crore, up from Rs 35 crore a year back; that is an increase of 55%. Citibank NA’s commission went up by about 47%. Both these bank officials were unavailable for comment.
Is it possible that distributors, whose commissions went up substantially, sold more equity funds than debt funds? Typically, equity funds offer higher brokerage of about 75-100 basis points (100 basis points is equal to one percentage point) as against about 25-50 basis points that debt funds offer. That could be the reason why online brokerage ICICI Securities Ltd’s commissions, too, went up by 40%.
Online brokerages are do-it-yourself platforms that don’t offer much advice to investors; customers buy and sell funds on their own from their own computers with an Internet connection. Since retail investors are more attuned to equity funds—and are not much prone to buy debt funds on their own comparatively—online brokerages usually see a higher inflow in equities. ICICI Securities’ equity assets grew by about 25% in a year. “Yes, when investors buy directly, they do go for equities, but last year we saw a lot of interest in fixed maturity plans (FMPs) as well,” says Vineet Arora, head (product and distribution), ICICI Securities.
...compared with debt
Bajaj Capital Ltd’s group chief executive officer, Anil Chopra, echoes a similar sentiment. When asked why his firm’s commissions went down by 6% in 2011-12, he said that the firm recommended a lot of FMPs to investors last year. FMPs are closed-end debt funds that come with a fixed maturity. They invest their entire corpus in bonds and stay invested in them till maturity. Upon maturity, they sell the bonds and give the money back to their investors. Last year as interest rates were on a rise, FMPs sold like hot cakes as investors took advantage of high-yielding debt instruments that these FMPs invested into. But they don’t earn much commission for distributors. Upfront fees, typically, in FMPs are 10 to 15 basis points; trail fees are nil.
“Apart from FMPs, last year we also advised a lot of our investors to buy capital-protection oriented (CAP) funds and other tax-free and tax-saving bonds. In these volatile times, capital protection made more sense than attempting to grow it (capital),” says Chopra. CAP funds also yield as much to distributors as FMPs do. Chopra says many bank distributors don’t sell FMPs much because they prefer to sell their own banks’ fixed deposits.
Distributors earn fees in two ways. One is upfront fees and the other is trail fees. While fund houses pay upfront fees from their own pockets (in other words, asset management fees that they collect from you, the investor, every year as part of the total expense ratio, or TER, of a maximum of 2.5%), trail fees comes from the TER.
Last week, the MF industry met the finance ministry officials suggesting ways to revive interest among distributors and the MF industry. One of the steps that the industry suggested was an increase in TER and allowing fungibility; this will allow fund house’s income and distributor commission to go up.