The break neck growth in mutual fund distribution has come to an end if the latest numbers on the net individual distributors added to the industry is anything to go by.
As per the recent Association of Mutual Funds in India data, the industry added nearly 8,600 new individual mutual fund distributors last fiscal. However, the total number of individual mutual fund distributors (MFDs) rose only by around 3,500 which implies that nearly 5100 individual MFDs have not renewed their ARN (application reference number) which is a unique code given to each distributor.
In fact, the new addition of mutual fund distributors has more than halved last fiscal compared to 17,600 logged in FY19.
The shrinking margins, ban on upfront commission and rising compliance cost has made mutual fund distribution business unviable on a standalone basis.
Moreover, the quality of engagement with investors has to be enhanced manifold for attracting fresh investments given the poor returns on their prevailing mutual fund investments, said Sanjay Joshi, an individual financial advisor based at Kolhapur.
Trail commission model
Jimmy A Patel, Managing Director, Quantum Asset Management Company, said while the expenses for mutual fund distributors are upfront, they start earning only over a period of time due to the trail commission model followed in the industry.
The use of technology will be of help only after a distributor’s business reaches a certain size as it involves huge initial capital expenditure including a rented office and adequate qualified employees not only to manage online queries but also store supporting manual documents for regulatory compliance, he added.
Patel expects inflows through monthly systematic investment plans to slowdown in coming days as distributors reach shrink.
Incidentally, flows through systematic investment plan (SIP) was down three per cent at ₹8,376 crore last month against ₹8,641 crore and ₹8,512 crore logged in March and February. AMFI does not see it as a downtrend in SIP inflow and expects it to reverse soon.
In a bid to bring down distributors cost, SEBI should consider a repository of investors documents which means an investor submits a document for one mutual fund investment which should be considered for all his future fund investments, he added.
However, the mutual fund distribution business beyond top 30 cities is still surviving as regulation allows fund houses to pay higher commission for attracting inflows from smaller cities.
AMFI’s ambitious target
In this scenario, the industry body AMFI has set an ambitious target to add 4 lakh new distributors and achieve an asset under management of ₹100-lakh crore