Volatile equity markets and the revised expense ratios of mutual fund (MF) schemes as per the new slabs effective April 2019, were the key factors responsible for a fall in net equity fund inflows in April.
Net equity funds inflows (including tax-saving equity funds) were at Rs 4,229 crore, the lowest level since September 2016, and more than half that of March at Rs 11,756 crore.
A Securities and Exchange Board of India (SEBI) order late last year had mandated revision of mutual fund expense ratios from April 2019. The new slabs of the expense ratios have been designed to bring down the costs that investors pay to their MFs. The larger the scheme, the lower is the expense ratio.
“Naturally, if the expense ratio goes down, the distributor commission will also drop. While many fund houses are yet to come out with revised distributor commissions, many distributors preferred to wait and watch, waiting for the new commission structures of fund houses. Some distributors, especially banks, have now started selling alternate products,” said the chief executive officer of a mid-sized fund house.
Earlier, equity funds were allowed to charge a maximum equity ratio of 2.5 percent. This gradually reduced as the scheme size went up, as per SEBI’s slab structure. However, the old slab structure was such that the expense ratio (in %) would remain stagnant once the scheme size crosses around Rs 5,000 crore. In contrast, the new expense ratio slabs will ensure the expense ratio (%) of the scheme continues to drop even if the scheme size crosses Rs 50,000 crore <see here: https://tinyurl.com/yc9pkubw>.
“The fall in expense ratios has definitely impacted the inflows of our fund house. But some of it is also because of the market uncertainty caused by election season,” said a senior mutual fund industry official who requested anonymity.
SEBI had already banned upfront commissions in mutual funds in October 2018. Upfronting of commissions -- the practice of paying all upfront commissions at the start of the investment -- was also banned, except for systematic investment plans of up to Rs 3,000 a month.
As per April 2019 data from the Association of Mutual Funds of India (AMFI), equity funds inflows fell to Rs 17,440 crore from about Rs 27,650 crore a month ago. However, the average monthly inflows into equity funds between November 2018 and February 2019 have been around Rs 15,000 crore.
Apart from a fall in distributor commissions, balanced funds continued to see massive outflows. In the month of April 2019, Rs 7,206 crore went out of balanced funds, up from Rs 6,107 crore in March 2019. So far in 2019, balanced funds net outflows have been close to Rs 21,500 crore as compared to a surge in net inflows in the years of 2016 and 2017.
Budget 2018 had re-introduced long-term capital gains of 10 percent in equity funds over a gain of Rs one lakh. It also introduced a dividend distribution tax (DDT) of 10 percent on equity funds, which took the sheen away from balanced funds. Many funds houses and distributors had sold the dividend plans of balanced funds as some sort of regular income instrument to retail investors. The introduction of DDT rendered dividend plans of balanced funds tax inefficient.
“Up until last year, many balanced funds were mis-sold. Investors of these funds mistook the 1 percent yield as 1 percent return per month. But the mixture of DDT and volatile markets had an impact on returns and slowly investors realized. The outflows in balanced funds have picked up since and have continued,” said the chief executive officer of a fund house on conditions of anonymity.
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