Mutual fund houses are paying abnormally high commissions to get distributors from beyond-the-top-15 cities (B15) to sell their schemes.
According to sources,fund houses are shelling out commissions of anywhere between 3% and 3.5% for equity and balanced schemes. Even commissions for monthly income plans (MIPs),which are essentially debt products with an 80:20 allocation towards debt,are as high as 3%. In the top-15 (T15) cities,commissions for similar products range from 1.25%-1.5%.
Fund houses,especially the bigger ones,are giving higher commissions to B15 agents and keeping T15 commissions low, said a senior fund official,on condition of anonymity. What they are essentially doing is robbing Peter to pay Paul. Why should anyone from Mumbai or Delhi pay for someone from the smaller cities?
According to a senior distributor,fund houses have opted to target mostly large-ticket clients in the B15 cities. I don’t think the B15 push is achieving the aim of improving penetration in the smaller cities since the focus has been on select clients, he said.
While some fund officials have decried this practice of paying high commissions,saying the practice is not sustainable and would benefit the bigger fund houses more than the smaller ones,others see it as a necessary evil to attract distributors in smaller towns. Giving incentives for driving sales is a common practice across industries. If you take the FMCG industry,for example,sales often hinge on discounts given to customers and commissions paid to distributors, said a fund official.
Besides paying high commissions to distributors,fund houses have entered into distribution tie-ups with public sector banks to push sales in the smaller towns. For instance,Birla Sun Life MF,HDFC MF and IDBI MF have tied up with Syndicate Bank to sell their schemes through the bank’s branches. However,nine months after Sebis circular concerning the B15 push,fund houses are yet to make inroads into the hinterland. According to a recent report released by CII-PwC,the top five cities contributed 74% to the overall industry AUM at the end of March 2013 compared with 71% in March 2012.
Amfi officials admitted that it will take time to penetrate the B15 cities,given the time required to educate the customers about products and convince distributors to sell in these regions. However,they are positive the efforts will bear fruit in time. Last week,Amfi CEO HN Sinor said he was happy to see several fund officials personally making trips to the smaller towns. He had also expressed confidence that the additional incentive of 30 bps for going beyond the top-15 cities would help in shoring up the revenues of mutual fund houses.
Sebi,in its circular last year,had allowed asset management companies (AMCs) to charge an additional TER (total expense ratio) of up to 30 bps to expand the geographical reach of mutual funds and bring in long-term money from smaller towns.