Retail investors looking to cash in on the booming stock market have been increasingly taking to the mutual fund route over the past few years. While this has no doubt fattened the bottom lines of asset management companies, it is mutual fund distributors who are actually laughing all the way to the bank, reports The Economic Times.

Bizzare as it may sound, an ET - Boston Consulting Group study has revealed that mutual fund distributors put together made more money by hawking various schemes to investors than the mutual fund houses, which managed funds for investors. As per ET-BCG estimates, mutual fund distributors earned more than Rs 4,000 crore in FY07, while AMCs put together earned between Rs 2,100 and Rs 2,500 crore as revenues only. Roughly speaking, of the total revenue pie of the mutual fund industry, the lion’s share of 60% went to MF distributors and the remaining 40% to AMCs.

Distributors selling MFs get a commission every time you put money in a new fund offer, invest in an existing scheme or even stay invested in a scheme that you invested before. With AMCs trying to outdo each other in terms of assets under management, distributors have become a pampered lot.

“It is a myth that distributors in India get paid more than what they deserve,” says Rajeev Bajaj, MD, Bajaj Capital, one of the largest national-level distributors in India. “As a matter of fact, they should get a higher share of the revenue as the technology penetration in the country is very low and costs of distribution very high,” he adds. He points out that margins in this business are constantly under pressure as manpower and infrastructure costs are shooting through the roof.

However, not everybody is willing to buy that argument. Alpesh Shah, partner at BCG and one of the authors of the study says profits of MF distributors are expected to be much higher, thanks to its lower cost structures than fund companies. He calculates that if fund companies put together made Rs 1,000 crore of profits, it could be easily around Rs 1,500 or even higher for distributors. According to industry sources, banks such as ICICI Bank, Citibank, HSBC, HDFC and Stanchart are among the top mutual fund distributors and are known to earn at least Rs 200 crore of revenue annually. Over the years, MF distributors have been raking in the moolah by asking investors to move from their existing MF (in the guise of profit-booking) to equity NFOs. This has worked to their benefit since the commissions are highest during NFOs. However, this meant that holding period for investors has come down drastically.

The study estimates that the average holding period for an equity MF India has come down to around 14 months (approximately 3-5 years in the US). This trend, although beneficial to distributors, is hurting fund companies.
Says Fidelity India head Ashu Suyash, “AMCs typically start making money once the average holding period starts going beyond three years. But with the average holding period of a mutual fund scheme falling below a year, it is a fact that MF distributors make more than mutual funds themselves”.

Sundaram BNP Paribas Mutual Fund chief investment officer Prasad Nalam thinks that mutual fund distributors should not be singled out for blame.

“Take any industry — pharma, FMCG or any other — distributors always make a clean buck because they have to spend very little out of their commissions,” he says. As for agents who sell mutual funds at various places, he feels that the majority of them are still young. He feels that as the industry matures, distribution standards would go up gradually.

By the way, if you wait for some more years, there is a good chance that AMCs and distributors would also get listed. Investing in the shares of these companies could be a smarter option than investing in MF schemes.

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