Why MF vendors haven't grown as fast as MF assets

A rising tide does not lift all boats—an adage that mutual fund distributors will vouch for.

- Srushti Vaidya & Apoorva Ajith

While equity assets under management grew a record 10x in the last decade, the number of mutual fund distributors just 2.5x. Industry executives and experts pointed to three reasons: Popularity of direct plans which bypass distributors; lack of incentives for fund houses to train distributors; and Sebi's efforts to crimp the total expense ratio (TER), which is now capped at 1.05-2.25%.

Industry insiders recalled the introduction of TER slabs, removal of upfront commissions, and introduction of trail commissions in 2018, changes which sent distributors reeling. The situation may worsen if a Sebi plan to cut the overall expense ratio by 15 basis points (bps) takes effect.

The growth in the assets at State Bank of India, the biggest MF distributor, grew at a compound annual growth rate of 61% from March 2015 to March 2018. After the 2018 rule change, its mutual fund AUM has expanded at 27% CAGR until March 2025. For ICICI Bank, the comparable numbers were 27% and 9%. The trend is similar for others among India’s top five distributors.

A similar impact is anticipated from the proposed 15 bps reduction in TERs across slabs. Sebi has also proposed to scrap an additional charge of 5 bps AMCs earned over the exit load, the fee charged by asset managers if an investor prematurely exits the scheme. AMCs currently earn the 5 bps regardless of whether the investor leaves the fund or not.