Should MF investors worry about the cut in distributor commission?
The regulator in September 2018 came up with the cut in maximum TER (Total Expense Ratio) that a mutual fund can charge. SEBI (Securities and Exchange Board of India) set the maximum expense ratio based on the size of the fund. More the size lower would be the TER and vice versa. Following is the AUM slab as set by the SEBI.
| AUM Slab (In Crore) | TER for Equity Schemes | TER for Other Schemes (excl. Index, ETF and FoF) |
| 0-500 | 2.25% | 2.00% |
| 501-750 | 2.00% | 1.75% |
| 751-2,000 | 1.75% | 1.50% |
| 2,001-5,000 | 1.60% | 1.35% |
| 5,001-10,000 | 1.50% | 1.25% |
| 10,001-50,000 | TER reduction of 0.05% for every increase of 5,000 crore AUM or part thereof | TER reduction of 0.05% for every increase of 5,000 crore AUM or part thereof |
| Above 50,000 | 1.05% | 0.80% |
The rationale behind SEBI's move was that costs don’t increase in proportion to an increase in assets. Therefore, to pass on the benefit of economies of scale to investors SEBI came up with the TER slabs. This impact of a cut in the expense ratio can be shared between the AMC (Asset Management Company) and the distributors. However, AMCs rather than absorbing it, at large they have passed on the cut to mutual fund distributors. Small mutual fund distributors and the independent financial advisers have been hit the most with this.
So, as a mutual fund investor how this can be impacted? Due to this the MFDs (Mutual Fund Distributors) or IFAs (Independent Financial Advisers) may focus on churning your portfolio by exiting from the schemes providing less commissions to the schemes of same category providing higher commissions. There is also a possibility that the MFDs or IFAs may start focusing on other investment products such as ULIPs, PMS, etc. though mutual fund as of now is a better alternative to all these products. But as other products give better commissions than mutual funds, the MFDs or IFAs may prefer them over mutual funds. So, rather than controlling the mis-selling this will further lead to mis-selling. To avoid this, it is prudent to absorb the impact of a cut in TER equally by AMCs and MFDs or IFAs. This would help create a win-win situation.