Mumbai: The mutual fund industry is working to create its own KYC Registration Agency (KRA) to slash know-your-customer (KYC) expenses that have become a perpetual burden, four people familiar with the discussions said. Fees paid to KRAs weigh on asset managers' profitability and make small investments less viable.
Mutual Fund Utility (MFU), a 10-year-old non-profit funded by asset management companies and formed under the Association of Mutual Funds in India (Amfi) in 2015, is in the process of applying for a KRA licence with the Securities and Exchange Board of India (Sebi), the people cited above said on the condition of anonymity.
“MFU is in the middle of the formation of the KRA and has applied for a licence with Sebi, while simultaneously working on the software, operations, and team. If everything goes well, we may see an industry-owned KRA by the last quarter of this financial year,” one of the people cited above said. “MFU is trying to bring down the entire industry’s KYC costs by at least 40%,” the official said, adding that as volumes grow further, the costs can be pulled even lower.
Seamless onboarding
Earlier, financial market entities such as stockbrokers and mutual funds used to independently verify the identity and address of individual investors and store them. Every time an investor goes to a new broker or mutual fund, the process would repeat. Today, a KRA verifies and stores such information. When an investor signs up for a mutual fund, the AMC pulls information from the KRA database to enable quick, seamless onboarding.
For this service, AMCs pay around ₹35 to KRA agencies for every new investor onboarded. For a ₹500 monthly systematic investment plan, an AMC earns roughly 0.3% annually, excluding distributor payouts and operating expenses. That works out to about ₹18 a year. At that rate, it takes nearly two years for the AMC to recover just the fixed KYC cost.
So far, MFU has operated as a platform allowing investors to view mutual fund holdings in one place, similar to MF Central. A successful application could transform its nature and disrupt the dominance of Central Depository Services Ltd (CDSL) and National Securities Depositories Ltd (NSDL) which handle the bulk of the KRA business for AMCs.
When asked, Ganesh Ram, managing director and chief executive at MFU, said, "We are exploring entering the KRA business." Emails sent to CDSL and NSDL remained unanswered.
Fixed cost pressures
Fixed costs to sign up new investors have become a structural pain point for asset managers, particularly as regulations require schemes to reduce total expense ratios as assets grow. While variable costs such as registrar and transfer agent fees and distributor commissions typically decline with scale, KYC and depository charges do not.
That mismatch has weighed on profitability across the industry, especially in smaller ticket-size investments where fixed onboarding costs form a disproportionately large share of revenue, according to experts.
Impact
The competitive impact could be significant if MFU forces a repricing of the market.
If a new player offers significantly lower KYC charges, existing KRAs may be compelled to lower pricing, which could affect their revenues and profitability, said Vinit Bolinjkar, head of equity research at Ventura.
If price cuts kick in, the impact could be much bigger for CDSL because its subsidiary CVL contributes nearly 20% of consolidated revenue and an even higher share of profits, said Abhinav Tiwari, research analyst at Bonanza, a brokerage firm.
“For NSDL, the impact is smaller as NSDL’s overall business is much more diversified across depository services, issuer services, and other financial infrastructure activities. So the KYC business is likely less than 5% of consolidated revenue,” Tiwari added.
Beyond asset managers, lower KYC charges reduce fixed onboarding costs that feed into mutual fund schemes’ total expense ratios (TERs).
Fee caps
Industry experts say any reduction in fixed costs may also influence how regulators think about fee caps. TER slabs are defined by Sebi, and lower underlying costs could, over time, give the regulator more room to tighten expense limits.
Lower KYC charges reduce the fixed, per-folio onboarding cost that AMCs currently bear, which directly eases the fixed-cost squeeze on their balance sheet, said Debasish Mohanty, chief strategy officer at The Wealth Company Mutual Fund. For a business where scheme TERs are tightly capped and trail commissions are under pressure, any reduction in non-variable costs helps protect margins and frees up room for growth spends, Mohanty added.
However, the extent to which savings are passed on to investors remains uncertain, particularly in active funds where margins and distribution economics are more complex.
In index funds and large AUM schemes, AMCs pass on most structural cost savings rather than retaining the entire gain, Mohanty said.