Higher MF expense ratio in new cities may be the game changer

Sneha Padiyath Mumbai | Updated on March 12, 2018


Analysts feel lot of room to widen reach in top 15 itself

In a move to increase investment penetration, SEBI recently allowed fund houses to charge 30 basis points more as expense ratio for bringing in 30 per cent of the inflows of a scheme from beyond top 15 cities. But some question the need for higher penetration into newer regions at the cost of existing cities, which itself are struggling to rope in new investors..

According to AMFI (Association of Mutual Funds in India) data, the top five cities in terms of their contribution to the assets under management (AUM) are Mumbai, Delhi, Bangalore, Kolkata and Chennai. They contribute 73.66 per cent of the industry AUM, which refers to the total corpus available with fund houses for investment management.

The top 15 cities contribute 86.95 per cent to the total AUM.

Explore full potential

Experts and analysts argue that fund houses first need to explore the full potential of the top 15 cities before they can venture beyond.

Analysts said that when a city like Chandigarh (15th} on the list) contributes only 0.5 per cent to the total AUM, why should the industry aspire for those beyond top 15?

According to Estimates of State Domestic Product 2011-12 data, the city-union territory has a per capita income (PCI) of Rs 1,28,634. Gujarat, another State which finds representation in the top 15 list through Ahmedabad, Vadodara and Surat, has a PCI of Rs 75,115.

But these cities together contribute about 4.6 per cent to the total AUM, same as Chennai. Delhi has a PCI of Rs 1,50,653, while Maharashtra has a PCI of Rs 83,471.

Opportunity to include

However, some of them are looking at this new proposal as an opportunity to include well-established commercial capitals.

“Cities like Coimbatore, Kozhikode and Kochi, with a lot of wealthy population, are not part of the list. SEBI seeks to explore the potential in such cities through this largesse . It posts a lot of opportunity to get more retail investors for both fund houses and distribution houses,” said Renjith R.G., National Head — Distribution, Geojit BNP Paribas Financial Services.

However, MF officials said the new plan may not necessarily see all fund houses making a beeline beyond the top 15.

“There is a social need to take the industry to more investors. Though the incentive provided is for the cost incurred by the fund house in reaching new investors, that does not mean fund houses will stop doing more in areas where we are already present,” said an official at a bank-promoted mutual fund house.

The industry, for its part, is gearing up to reach out to more investors through investor awareness initiatives and tie-ups with other distribution channels such as banks.

But analysts say that industry players need to strike a balance between the right products and the right target audience. Ajit Dayal, Chairman, Quantum Asset Management, said: “The industry should not focus on whom they are selling to but whether you are selling the right product to the investor or not. Fund houses need to go back to the fundamental question of whether they are serving the investors’ interests or not.”


Published on September 03, 2012

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