MFs banking on special pacts
Non-bank fund houses forge such tie-ups with distributors to compete with MFs backed by banks
Non-bank fund houses are looking to enter into special arrangements with distributors to expand their asset base. Essel Mutual Fund (MF) recently gave a token stake in its business to NJ India Invest, the country’s largest distributor in terms of commission.
Reliance MF and Vakrangee entered into a tie-up in July to distribute the former’s mutual fund products in under-served areas.
According to experts, in an industry dominated by fund houses backed by large banks, such tie-ups can help in improving competition.
More than 60 per cent of the assets managed by the top five fund houses belong to bankbacked ones. The top five dominate the industry with more than a 50 per cent market share.
Banks are leading the charts in the fund management business and distribution. The data available with the Association of Mutual Funds in India (Amfi) shows that banks earned ~35 billion as distribution commission in 2017-18.
This accounted for more than 40 per cent of the commission the MF industry paid in 2017-18.
The link between asset size and bank backing becomes more clear from the distributor commission fund houses pay their bank sponsors.
An analysis of the data put out by Value Research showed, on average, 47 per cent of the commission paid by the nine bankbacked fund houses in 2017-18 went to their bank sponsors.
The Securities and Exchange Board of India (Sebi) is concerned over the lack of competition in the MF industry. “It is a major cause for concern that despite such tremendous growth, a majority of the market share of the industry remains concentrated with a few big players,” said Ajay Tyagi, chairman, Sebi, at the Amfi Mutual Fund Summit 2018.
Experts say fund houses that don’t have a banking channel within their own group firms will have to think differently.
“Distributors have played a key role in the growth of the industry. The relations need to evolve and go beyond commission. We want to treat distributors as partners in growth. The stake was offered to NJ India at a fair value. We are hoping that more people will come on board,” said Rajiv Shashtri, chief executive officer, Essel MF.
Vakrangee said in July it had entered into an alliance with Reliance MF. “(According to) the arrangement with Reliance MF, Vakrangee through its Nextgen Vakrangee Kendras will offer mutual fund distribution and help Reliance MF to extend their reach to un-served and underserved areas,” the exchange disclosure said.
According to people in the know, Reliance MF recently entered into a tie-up with Suvidhaa Infoserve. Sources suggest four-five similar tie-ups are in the works. Sebi recently decided to do away with the upfront commission distributors get. Experts say removing upfront commission will nudge more distributors to shift their focus to the scheme’s performance and look beyond commission.
At the same time, there is debate on whether there is a need for rationalising distributor commissions now when there is still lack of distributors in the MF industry.