SEBI has unleashed a set of fundamental changes to the regulations governing mutual funds in India.
What are the proposed measures?
Assets under management(AUM) of the industry are at a record of Rs 25 lakh crore, resulting in a revenue of about Rs 13,000 crore.
The market regulator has decided to lower expenses paid by investors of equity mutual fund schemes.
Total Expense ratio - TER is a percentage of a scheme's corpus that a mutual fund house charges towards expenses including administrative and management.
TER for equity-oriented mutual fund schemes were capped at 1.25 per cent and for other schemes at one per cent.
The cap for fund of funds will be 2.25 per cent for equity-oriented schemes and two per cent for other schemes.
Also, the TER will go down as the AUM slab increases.
For instance, the TER ranges between 0.8 and 1.05 per cent for the for the highest AUM slab (over Rs 500 billion), whereas it ranges between 2 and 2.25 per cent for the lowest AUM slab (0 to Rs 5 billion).
Transparency - SEBI has mandated that commissions and expenses shall be paid from the scheme only and not by any other route.
Further, the mutual fund industry has to adopt the full trail model of commission in all schemes without paying any upfront commission.
Disclosure - SEBI requires category-wise disclosure of all schemes’ returns with respect to its total returns to be made available on the Association of Mutual Funds of India’s website.
Borrowings – Companies with outstanding borrowings above Rs 1 billion shall raise 25 per cent of their incremental borrowings for the year through the bond market.
What could be the effects?
A mutual fund has a certain fixed cost and after a certain fund size, the extra cost of managing extra money is marginal.
Hence, Lowering of TER for higher AUM companies avoids the chances of any unfair pricing.
An upfront commission is an amount that fund distributors receive for getting investors to put money into a fund.
This means that the distributor’s interest lies in getting a transaction done, hence they try to keep moving the money and creating more transactions.
Hence, SEBI has outlawed it and instead go for trail commission.
With this, as long as the investor is invested, the distributor gets a steady stream of revenue.
This avoids the need for switching money merely to get as many transactions as possible.
SEBI’s move to bar mutual funds from paying fees to distributors from their books is also seen as an effort to prevent mis-selling.
This is because the commissions come from the underlying schemes and not the asset management companies.
SEBI’s move to promote corporate bond market is difficult to implement in the absence of any real reforms.
This is witnessed by the share of corporate bond market to GDP at around 17%, way lower than the equity market at 80 per cent.
Also, there are concerns that advisers could push financial products with higher costs and fees on account of lower expenses and commissions.
Hence it is necessary to ensure that lowering of expenses leads to passing on the benefits of efficiencies to investors.
