The mutual industry adopted a new expense ratio regime from FY27 which saw a segregation of expenses controlled by fund houses from charges like brokerage, exchange and regulatory fees and other levies like GST, STT, stamp duty etc. While this was aimed to increase transparency about charges levied by fund houses to investors, it also led to a reduction in the commissions for mutual fund distributors.
Equity Schemes
The general metric for distributor commissions, average distributable TER (Total Expense Ratio) defined as the difference between expense ratios for regular and direct mode recorded a reduction following the implementation of the new regime across equity scheme categories. For instance, the average distributable TER for mid cap and small cap schemes recorded a reduction of close to 3 basis points in Q1FY27 while for flexi cap and large cap schemes, the reduction is over 2 bps and 6 bps, respectively.
Volume Growth
Experts believe that the new regime will mean higher pressure on distributors to increase their sale volumes to make up for the impact of lower commissions. Chennai-based distributor Chokkalingam Palaniappan of Prakala Wealth said that the new regime has led to 3-5 bps reduction on average in the distributor commissions. He added that due to the reduction in commissions, the importance of sales volume increases for distributors in order to scale up their operations and increase their income. He believes that this will make things difficult especially for newer distributors who struggle to acquire new clients compared to more established players.
Siliguri-based distributor Prabin Agarwal said while the reduction in margins is a natural progression for a growing industry, it has impacted the distributor commissions with some fund houses reducing commissions more than others. He added that the reduced commissions will have to be factored by distributors while planning to grow their operations. Further, it will also increase the time period required by newer distributors to break even in their business.
Mumbai-based distributor Sadashiv Phene also echoed a similar sentiment and said that reduction in commissions has led to frustration among the distributor community.
Overall, this move is also expected to have a long-term impact on the mutual fund distribution business. Palaniappan said that over the years, the commissions in the mutual fund industry have declined with the growth of the industry. He believes that over a long term, reduced commissions and the need to increase volumes may lead to consolidation in the mutual fund distribution industry slowing down the entry of new distributors and smaller distributors potentially giving up independent practice to join bigger players or leaving the industry.