BENGALURU: Since the start of April 2015, Association of Mutual Funds in India (Amfi) had asked all the fund houses to cap all upfront commissions at 1 percent. After initial resistance which lasted a while, a majority of fund houses had agreed to comply with the new rule. But, According to study conducted by Amfi, it has come to notice that capping of upfront commissions has resulted in lower distribution commission in the Indian mutual fund industry for the last financial year. Latest report indicates that the gross commission and expenses paid to the distributors during FY2015-16 stood at Rs 3,647.63 crore, which is a significant drop of 23%, as against Rs 4,744.57 crore in previous financial year.

Equity funds, including the equity-linked saving schemes (ELSS) witnessed net inflows of over Rs 74,000 crore in the previous financial year. The broader Sensex went down by around 9.4 percent due to global slowdown concerns and muted earnings growth. Most fund houses usually pays a trail commission in the range of 50 basis points to 75 basis points (where 100 basis points = 1 percent) to the distributors, as long as investors stays invested in the scheme. The FY2014-15 marked huge upfront commissions being paid by fund houses through launching close ended schemes. This implicated in rise of equity markets and meant distributors would earn huge commissions by selling to investors.

Capping was introduced to check this huge commission payment, and Amfi has been successful in diminishing the upfront commissions which were burning a hole in consumers’ pockets. This move has helped financial institutions in the country as banks such as HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Citi Bank, and Axis Bank have surfaced as the top commission earners from mutual fund industry.

This report comes as a surprise as there have been robust inflows into equity funds and new additions has been introduced for the distributors in the beyond-15 (B-15) cities. But, as it’s mostly likely, the drop in distributor commission is a direct result of capping of upfront commission by the industry trade body. Though distributor commission has witnessed reduction, but there has been an increase of 26 percent on the assets under management (AUM) from B-15 towns in retail segment. The value has escalated from Rs 108,184 crore as on March 31, 2015 to Rs 135,806 crore as on March 31, 2016.

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