The mutual fund industry growth has been soaring, but now it has seen a massive new change. Sebi has remodelled its entire fee structure. The watchdog revised the slabs for fees which mutual funds can charge customers for asset management. The regulator kept a massive permissible limit of 2.25% for equity schemes, while 2% for other schemes of the total assets under management (AUM).
Simply put, now the amount of commission you pay to the mutual fund houses for managing your investment money will come down and hence give you a better return. However, such will impact across all funds should be effective in the coming 2-3 months.
Navin Chandani, Chief Business Development Officer, BankBazaar said, “So, the charges that investors pay to mutual funds houses to manage their money will now be reduced by around 10 basis points (bps) to as high as 60pbs in some cases. This, in turn, means marginally higher returns for investors.”
Here’s how you will benefit from the fee cut in mutual funds, Chandani explains.
For instance, if your mutual fund investment value is Rs 1,000 and your TER is 2.75%, you are paying Rs 27.5 as fees during redemption. With 50 basis points reduction to 2.25%, your fees will be reduced to Rs 22.5, saving you Rs. 5. The larger your investments, the higher your savings.
These savings mean a marginally larger part of your money is going to fetch you returns. That is, your investment amount now rises to Rs 977.5 from Rs 972.5 earlier.
Since, the quantum of investment has gone up; it essentially means you are acquiring more number of mutual fund units whose values will presumably appreciate with time. This appreciation would now be even more because of the effect of compounding.
Hence, you are in win-win situation with the new fee structure, however, this is not a good news for distributors especially banks.
Chandani said, “TER is on the declining trend it will impact the commission payout structure to mutual fund distributors. More and more fund houses will adopt trail-based commission payment to distributors while abolishing upfront commission on investments (with few exceptions like SIP).”
This means that intermediaries would attempt to have a long-lasting relationship with investors in order to have continuous flow of trail commission. Therefore, as an investor, you stand the chance of getting better service and advice by your distributors or other intermediaries.
Explaining how distributors will be impacted, CLSA outlined that equity AUMs form about 40% of total funds and this cut could lead to a 25% earnings impact for the sector—a tad higher for larger funds given a higher share of equity AUMs/larger schemes.
Therefore, companies plan to pass on the majority of this to distributors and this will be key in defending earnings. Recently, in mid-2018, fees were cut 15bps and most funds passed on 70%- 100% to distributors.
CLSA adds, “The shift in the payment of brokerages from a mix of upfront and trail to pure trail will help reduce investor churn and also the improve working capital cycle. We see some knock-on impact for brokers and private banks which are distributors of mutual funds. A potential risk arises for life insurers in the case IRDAI reviews fees on Ulips.”
For I-Sec, mutual fund distribution fees form 15% of revenue and a 10bps cut in their fee could impact FY19 PBT by 4%.
Private banks are also large distributors of mutual funds and cold see some impact on their earnings due to lower bancassurance income.
Retail investors are increasingly opting for systematic investment plans (SIPs) in mutual funds as the industry garnered over Rs 7,600 crore through this route in August, a surge of 47 percent from the year-ago period.
With this, total funds garnered through SIPs has reached to Rs 36,760 crore in the current fiscal so far (April-August), according to the data available with Association of Mutual Funds in India (Amfi).
In the entire 2017-18, over 67,000 crore was mopped-up through SIP route and more than Rs 43,900 crore in the preceding fiscal.
Equity mutual funds, including arbitrage funds and tax-saving or ELSS schemes, witnessed redemptions worth Rs 22,362 crore in August, shows data from Amfi. The redemptions are the highest in the last five months.