The growth rate of mutual fund commissions far outpaces the revenue growth of mutual fund houses

Good times for mutual fund distributors but no so good times for mutual fund houses.

The past few years, especially since 2014 have really good to the mutual fund industry. The assets under management (AUM) of the industry which stood at ₹10 Lakh Crore has more than doubled and stood at ₹ 22.86 Lakh Crore as on 30th June, 2018.

In the same period mutual fund commission payouts have also shot up. In 2017-18, ₹ 8500 crores were paid in commissions to distributors vs ₹ 5000 crores in 2016- 17.

Someone sent me this report on mutual fund commissions by JM Financial and this sort of puts a a lot of things into context. Here are the highlights from the report

  1. We observe the recent spike in gross commission payouts for the AMC Industry, which has
    coincided with the windfall increase in total flows into equity mutual funds over the past 2
    years. Growth in gross commission payouts (i.e. including the amount expensed within MF
    schemes) has increased 52-85% for Top AMCs in FY18 and at 31-91% on a 2-year CAGR
    basis (Exhibit 1). Moreover, we also observe that even though TER has contracted across
    equity MF schemes over the past 5 years, commission payouts as a % of AUM have only
    increased. As a result, commission payouts have outpaced the rate of growth of equity MF
    AUM, as well as the the topline growth of AMCs.
  2. The rate of growth of gross commission received by top distributors, exceeds
    the growth rate of revenues of AMCs over FY14-18. While commissions received by top
    distributors has grown at 41% CAGR over FY14-18, revenues for some of the top AMCs
    have grown at a CAGR of 24-36%.
  3. AMCs have had to shell out higher commissions in order to maintain/improve their market shares. Although commissions as a % of avg MF AUM has increased across the board, those AMCs which have been more generous in commission payouts have been able to increase their market shares.
  4. We studied the financials of 5 marquee schemes across fund houses (Exhibit 5-14). Our analysis suggests that even though TER has witnessed a 30-45bps contraction across schemes over the past 5 years, the proportion of commission payouts has only increased. Commission / AUM has expanded by 10-50bps across schemes depsite the TER contraction.

Commission payouts and marketshare

Commission payouts vs revnue growth of the top AMCs

So, the investors who have invested in regular mutual funds would have borne these commissions. Makes no sense whatsoever to get the same funds, fund managers but lower returns and pay higher commissions.

You can read the full report here.