The Mutual funds regulator claims that they want to reduce the cost to the end investor. Great. So you should touch the costs of the manufacturer, instead it touches the costs of distribution.

Why the great regulator cannot come with a cost structure for “direct” investors. Whatever you want the cost to be…bring it there. Instead you keep creating amazingly complicated structures. So a big fund cannot pay more. Great, so if I have a big fund AND DON’T WANT TO GROW IT MORE, I can just reclassify into a category where it is DIFFICULT to sell – or impossible to sell. Obviously you should not do it so openly or blatantly. You should do it surreptitiously. Watch this space.

The only thing that seems to be happening is that the MF industry cannot understand what it is supposed to do. The conflict between the shareholder of the mutual fund, the unit holder, and the distributor – is something that the market should decide, not the regulator.

To quote the Fifa report, the purpose of reduction of costs was not meant to reduce the commission of the distributor. However the impact has been on the IFA. This just means that the IFA will vanish. Maybe by 2022 if not 2021. The benefits of economies of scale belong to the amc, not the IFA, so should the reduction of the commission be based on the aum of the scheme or on the aum of the distributor. Will it work? makes sense? to me it does not.

So what will the amc do? they will launch NFO – focused, specific funds – infra, medical, health, banking, nbfc, export oriented, sharia,…retirement, child plan, old age expense plan…..

Why would they do this? Simply because the ‘reward’ structure favors the small fund – and works against the large fund.

So we will see a huge line up of NFO….read this page…

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  1. First and foremost, the big fund houses are those who have multiple funds with AUMs of 20,000 crores and with high charges. The ones such as HDFC, SBI and ICICI charge 1.3% on direct plans and more than 2% on regular plans.Why? because much of their distribution costs go to their own sister concerns such as HDFC bank, SBI and ICICI bank.
    Smaller fund houses like Mirae, Kotak, etc are much more affording.

    HDFC’s top 5 equity funds have a total AUM of 125,000 crores and their average expense rate is more than 2%. So their income from these 5 funds alone is a mindboggling 2500 crores per year. Is it not enough? They have plenty of debt funds that are in 10k+ category as well. ICICI is not too far off, their top 5 equity funds are worth 100,000 crore with expense of 2%. Thats 2000 crores as income to ICICI
    If SEBI is going to simply watch HDFC and ICICI charging more and more and reward their shareholders and their sister concerns, then there is no need for a regulator at all. I personally dont like fund houses coming up with IPOs. They are fund managers earning commission, why list in share markets?

    Why would IFAs be affected? They are pay only advisors to be paid by customers and not AMCs.
    Please clarify how IFAs are affected due to these cost controls.

  2. Distribution cost is a drag on the investment – adds no incremental value and hurts the long term performance.

    Charlie munger asked – Give me an example of a situation where increasing the price of a product leads to increase in demand.
    A smart fellow mentioned Luxuty goods…..
    Yes said charlie, 1 in 50 give that answer….but what about increasing your price so you can pay the purchasing agent….
    well that is how most mutual funds a re sold today..
    and that is why I disagree with your point of view.

    How can you justify a 1% distribution fee in perpetuity to the agent who has no active role to pay in the performance of the fund.
    I would argue that the regulator should ban any distribution fees after the first year or some stipulated period.
    It is like you asking the rentor to pay a 1% fee to the realtor each month – in perpetuity because he helped him/her find the house.
    Makes no sense, and I fail to understand your logic to support it.

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