Mutual fund industry welcomes B-30 incentive revival but expects limited flow benefit

Industry data show that B-30 assets now account for nearly 18% of total mutual fund AUM, with inflows heavily tilted toward equity schemes.

Mutual fund players have welcomed the Securities and Exchange Board of India’s decision to bring back incentives for distributors bringing in first-time investors from beyond the top 30 cities (B-30), but say the incentives are unlikely to provide a huge fillip as the segment has been growing well even without additional incentives.

The B-30 programme, first introduced in 2012, was designed to deepen mutual fund penetration in smaller towns by paying distributors an extra commission on inflows from these locations. Under the earlier framework, incentives were calculated as a percentage of total collections and had no monetary ceiling, allowing high-ticket investments to generate large commissions.

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Pravin Kulkarni, founder of UPInvest, a mutual fund distributor explained that there are many difference from the old scheme. “Earlier there was no cap on commission earned. In the new scheme it will be paid at the end of the year and there is a capping of Rs 2000 per unique investor. So it is now extremely difficult for a distributor to earn the same level of incentive which was possible in the old scheme,” he said, adding that the cap should “eliminate chances of mis-selling or mis-using the scheme.”

Kulkarni does not expect a dramatic pickup in investments because of the distributor incentives. “Growth of Investment in mutual funds did not hamper significantly after B-30 scheme was discontinued in Feb 2023. So I am not expecting huge positive impact because of the introduction of B-30 scheme. However, it will still motivate distributors to some extent even if there is a lower cap.” For distributors like him, he says, business and growth was from word of mouth from existing clientele and not necessarily driven by the commission.

Incidentally, SEBI discontinued the scheme in February 2023 after finding instances of application splitting and churning, even as B-30 assets had climbed beyond Rs 7 lakh crore, nearly a quarter of the mutual fund industry’s total assets.

In the latest development, the regulator has reintroduced the incentive but with firm guardrails. Distributors will receive 1% of the first application amount or the total first-year SIP investment, capped at Rs 2,000 per investor, for inflows from new individual investors using a new PAN in B-30 cities. Payments will be made at the industry level and tracked through PAN numbers to ensure no investor can be claimed by more than one distributor.

“The previous version of the B30 initiative was very different from the current announcement," says Scripbox’s Managing Partner Sachin Jain.

"Earlier, incentives were calculated as a percentage of the total collection from the 30 cities without any cap, which could be quite substantial. The new scheme provides a 1% incentive on the invested amount, capped at Rs. 2,000. This cap was set meaningfully, considering the industry’s long-standing demand to control the cost of acquiring new investors and the expected flows from smaller towns,” he adds.

Deepak Shenoy, CEO of Capitalmind Mutual Fund believes that the new ceiling reduces misuse as well as keeps growth prospects alive. “The Rs 2,000 cap is too small to incentivize fraud, so a lot of the past misuse will go away. It won’t matter much for urban investors, but it can still encourage participation in B30 areas, which have already been growing well. This seems like a way to continue that growth while keeping things controlled.”

Interestingly, Kulkarni believes that industry-level tracking will intensify competition. “There will be a tighter competition for acquiring new clients. Because once a folio created for new investor then that person is no longer a unique new client for every other distributor,” he says.

Industry data show that B-30 assets now account for nearly 18% of total mutual fund AUM, with inflows heavily tilted toward equity schemes.

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