Sales, marketing costs eat into mutual fund profits

While equity assets have doubled in the FY2010 as compared to the previous fiscal, higher sales and marketing costs are to dent profits of the Indian mutual fund houses. A McKinsey report, estimates that over 50% of total costs of an asset management company (AMC) comprise just the sales and marketing expenses.

“Indian mutual fund industry is in the growth phase and in terms of assets is smaller than other developed markets. So in terms of percentage our sales and marketing cost would be higher initially,” said Ved Prakash Chaturvedi, MD, Tata Asset Management. He added, however, that the marketing budgets would be lesser in absolute numbers.

The report also states that in India, while sales and marketing expenses comprised 54% of overall costs, fund management was another 12% and rest (34%) back office and IT infrastructure costs. However, in Western Europe, sales and marketing costs as a proportion of overall costs were much lower. In western europe, while sales and marketing comprised 24% of overall costs, fund management was another 32% with back office/IT expenses forming the rest of the costs (44%). The report further mentions that sales and marketing expenses needs to be effectively managed to enhance profitability. It is estimated that in the year 2000-10, sales and marketing expenses for the entire Indian fund industry has been over Rs 2,000 crore. Bulk of the sales and marketing expenses comprise the brokerage charges. While FY ‘ 10 figures are yet to be disclosed, Reliance Mutual Fund in FY ’09, approximately spent Rs 75 crore as marketing expenses which included Rs 66 crore towards brokerage fees and remaining towards advertisements. For HDFC MF, Rs 44 crore was towards brokerage fees and another Rs 11 crore towards scheme launch expenses in FY ’09. Both the above mutual funds earned Rs 375-400 crore in the form of revenues in FY ‘09.

After the ban on entry load post August ‘09, it seems the sales and marketing costs has escalated even more since mutual fund houses now pay it from their own pockets instead of investors. According to industry experts, several big as well as mid-size fund houses still pay an upfront commission to the distributor of over 1.25-1.5% on new sales.

Source: http://www.financialexpress.com/news/sales-marketing-costs-eat-into-mutual-fund-profits/609558/