The Foundation of Independent Financial Advisors (FIFA) feels the cut in the total expense ratio (TER) of the mutual fund industry leading to lower distributors’ commission, will reduce inflows.
In response to the market regulator SEBI’s consultation paper on TER, FIFA said net inflows, which increased to Rs 32,932 crore from Rs 3,426 crore between 2003-08, reduced drastically to Rs 484 crore when the distributors’ commission was cut due to abolition of entry load in 2009 and, subsequently, slipped to a net outflow of Rs 11,184 crore in 2013.
In 2014, when B-30 incentives were introduced, inflows zoomed from Rs 55,880 crore to Rs 1.60 lakh crore in 2018.
Once again, the net flows reduced to Rs 77,231 crore in 2019 when TER was cut. For the next two years, there was a moderation in net flows. For every change leading to a reduction in TER, distributors had to bear the maximum brunt, it said.
The SEBI observation that the benefit of economies of scale was not passed on to investors is based on certain incorrect assumptions, said FIFA.
Between 2018-22, there has been a 54 bps (basis points) reduction of TER of open-ended equity-oriented funds due to increase in scale, it added.
The Consultation Paper states that the actual expense to investors after including all additional expenses is higher than the prescribed base TER for the regular plan. The actual expenses are bound to be higher than base TER as these are additional expenses for which SEBI has fixed limits. Further, brokerage and transaction costs are determined by portfolio turnover and other charges like Securities Transaction Tax.
While the average AUM for FY’22 was about Rs 35 lakh crore, the total PBT was Rs 10,941 crore, which is a mere 0.31 per cent and after tax it reduces further to 0.23 per cent. An increase in AUM through the efforts of the industry should not be rewarded with reduction in profits, said FIFA.
The simple average transaction cost for actively managed open-ended equity-oriented funds is 0.25 per cent, while the median cost is 0.16 per cent. Hence, transaction costs are reasonable. The high transaction costs observed by SEBI may be attributable to STT rather than brokerage, it said.