The rise of small cities in Mutual Fund Investment

From the start of the this fiscal (FY19), the definition of top cities in terms of mutual fund penetration has changed. Earlier they were known as T15 and B15. Now they have been reclassified as T30 and B30. For the naïve, cities from where a majority of mutual fund inflows come are called Top 15 (T15) cities. Mumbai, Delhi, Chennai etc are some of the T15 cities. Those cities that do not figure among the T15 are called B15 or beyond (top) 15. The industry body Association of Mutual Funds in India makes this list.

But why should one worry about the T15 and B15? The current mutual fund rules laid out by the Securities and Exchange Board of India (SEBI) incentivizes MF distributors if they bring in money from the so-called beyond (top) 15 cities (B15) cities. The fund houses can charge an additional total expense ratio (TER) if the inflows are from B15 cities.
Nevertheless, it has been revised now and T15 and B15 have become T30 and B30. SEBI has revised the definition of top cities and beyond top cities for additional TER. This means, fund houses can charge an additional TER of up to 30 basis points, if the net inflows are from beyond top 30 (B30) cities and are at least (a) 30 per cent of gross new inflows in the scheme or (b) 15 per cent of the average assets under management (year to date) of the scheme, whichever is higher.

The reason why SEBI came out with these changes is that of the rise in the share of B15 AUM in the overall mutual fund AUM. Its share has increased steadily in the last few years from 16 per cent at the end of FY14 to 19 per cent at the end of FY18. Hence, realising that now the next set of cities need attention, SEBI has changed the incentive structure to focus on B30 cities.