TER clarity a welcome step, but India’s MF industry still far from scale: Feroze Azeez

SEBI’s move to unbundle statutory levies such as GST, STT and stamp duty from the total expense ratio (TER) of mutual funds has brought renewed focus on costs in the asset management industry. By creating a clearer distinction between the base TER and the overall cost borne by investors, the regulator aims to improve transparency. The key question, however, is whether this cleaner structure will actually translate into lower costs for investors or merely reset the accounting framework.

Responding to this, Feroze Azeez, Joint CEO, Anand Rathi Wealth believes the structural clarity is a welcome step, but cautions against excessive tinkering with costs in an already thin-margin business.

“One is lower cost, but if you look at this move of bifurcating it, I completely think that it makes sense. But cost reduction I personally think of 10 bps, 15 bps actually impacts investor adversely in my opinion because you are already at 0.8%, 0.9%, 1%; the business is so low, thinly margined. In rupee terms, of course, these companies have great profits, asset management companies, or even distributors have good profits, but this anyways is a very thinly margined business and anyways the client already has another option which is called direct, 10-15 paisa bachane ke badle, he can go direct and bring down the cost by 50-70 bps,” he said in an interview to ET Now.

Azeez argues that frequent revisions to expense ratios disrupt long-term business planning. Asset management and distribution, he says, are businesses built on assumptions that span decades, not quarters.

“So, tinkering with the cost on a long-term business model perspective, people create business models on the basis of a certain assumption. I do not encourage the change. If somebody is building a business, he needs to think 10-15 years. If you keep revising expense ratios, people have to change their business models, that is point one.”

At the same time, he strongly supports SEBI’s decision to separate statutory charges from the core TER, calling it a much-needed simplification.“But having said which, separating statutory brokerages from the main TER, creating a base TER and total TER is the best move. We are one of the largest distributors in India. We also find it very difficult to decipher this maze. So, I am very happy that they have separated it.”For Azeez, the real risk lies in focusing narrowly on shaving a few basis points rather than improving outcomes for investors.

“But if the objective is to save 10 bps and demotivate the manager, then if the manager is motivated, he will earn 2% more, that is the bit I would say and that is what like so many other emerged markets have not tinkered with the expense ratios that is resulting in a larger scale for the asset management companies.”

The discussion also turns to SEBI’s decision to scrap the additional 5 basis points allowed to incentivise penetration beyond the top 30 cities. As someone deeply involved in wealth management, Azeez is unequivocal that the industry is nowhere near achieving meaningful scale in smaller towns.

“See, I personally think we have reached nowhere any scale close to what India’s potential is. We have 70 lakh crore Indian rupees of mutual fund industry. If I have to just again convert the US mutual fund industry into rupees crores, as again 70 lakh crores mutual funds of the US are 3,500 lakh crores in rupee terms. We are just 2% of the US mutual fund industry.”

Even after accounting for population differences, he says the gap is stark.

“So, have I reached any scale? The answer is a big no. How many people buy gold vis-à-vis how many people buy mutual funds? You would be shocked. How many demat accounts do stocks and how many do mutual funds? We are not even as much penetrated as much of the number of stocks. People have independent stocks but have zero mutual fund.”

According to Azeez, penetration beyond the top cities remains shallow.

“So, we are nowhere close to tier II, B30 ke aage toh I do not see too much penetration.”

He also points out that on the HNI and wealth management side, mutual funds have lost ground to more flexible products such as PMS and AIFs, reinforcing the need to focus on expansion rather than cost compression.

“I personally think the next 5-10 years we should be focusing on scales which are sizable for a fifth largest world’s economy. If we are not focusing on that and we are going to be penny wise and pound foolish I think penetrations could be…”

From a practical standpoint, Azeez highlights the economic strain on distributors and independent financial advisers.

“Going and picking up an application of a mutual fund itself cost more money than that what you end are picking. Of course, digital has fortunately taken up, but there are other people feeding their families using an IFA model but today it is not even viable to go pick up a cheque of Rs 1 lakh when I get Rs 1,000 per year. The client expects you to meet him. You go, you will not even pay the Wi-Fi fee if you have 50 clients with 50 lakh aum.”