Mutual funds bat for location-neutral incentives to bring new investors

Fund houses have asked the Securities and Exchange Board of India (Sebi) to consider changes in the existing system of incentives for bringing in customers from smaller cities and towns.

Instead of the existing incentive for tapping investors beyond the top 30 (earlier beyond the top 15) locations, they want the markets regulator to allow them to charge extra for bringing in first-time investors, irrespective of whether they belong to top cities or smaller towns. It is unclear if the regulator will consider this. An email to Sebi did not elicit any response.

“We are assuming the market for top cities is saturated but even large cities such as Mumbai are not fully penetrated,” said a senior fund official. “Ultimately, you are looking for new investors and the incentive system should be agnostic of the location.”

In 2012, the markets regulator allowed fund houses to charge an additional 30 basis points (bps) in the total expense ratio if new inflows from beyond the top 15 cities (B-15 in sector parlance) were at least 30 per cent of the total in a scheme or 15 per cent of the average of assets under management (AUM), whichever was higher.

As of April-end, the AUM from beyond the top 30 (B-30) locations stood at Rs 4.02 trillion; those from the top 30 (T-30) centres accounted for Rs 19.2 trillion. This translates into a market share of 17 per cent for the B-30 locations.

In February this year, Sebi had modified the extra incentive structure for generating assets from B-15 places. From April 1, it said, fund houses will be allowed to pay an extra commission of 30 bps for incremental flows from B-30 places, as opposed to B-15 earlier. Accordingly, the terms and definitions of ‘15 cities’, ‘T-15’ and ‘B-15’ have been substituted with ‘30 cities’, ‘T-30’ (top 30) and ‘B-30’, respectively.

AUM from B-15 places grew 41.7 per cent to Rs 3.09 trillion as of March 2017, compared to a year before. It further increased by 38 per cent to Rs 4.26 trillion at end-March 2018. In comparison, the AUM from T-15 (the top 15 cities) grew 36 per cent and 19 per cent, respectively, in this period.

Sector experts say the momentum from smaller cities and towns remains strong. Fund houses say they have conducted investor camps and awareness programmes in more than 400 cities and towns. Also, the ‘mutual fund sahi hai’ campaign has helped bring in a lot of new investors from underpenetrated regions. The first phase of the campaign started last year, with the idea of addressing untrue perceptions on MFs.

According to the recent data, B-30 locations show an affinity towards equity assets, with 65 per cent of the MF assets from these locations being in equity schemes, as of April. In contrast, about 36 per cent of the T-30 assets were in equity schemes. The higher concentration of debt assets in T-30 locations was due to a higher proportion of institutional participants from these places, says the Association of MFs in India.

About 27 per cent of overall MF assets held by individual investors came from B-30 locations. About 7 per cent of institutional MF assets came from these locations; the remaining 93 per cent was from T-30 locations. Individual investors held Rs 12.07 trillion in MFs as of end-April, an increase of 36 per cent over April 2017.