0.1659
900 319 0030
x

Changes in Mutual Fund Regulations – II

iasparliament Logo
September 22, 2018

Click here to know more about it.

Why in news?

SEBI recently announced changes in rules governing mutual fund.

How it serves as a pro-investor measure?

  • All the fees and costs chargeable to the investor are packed into a single Total Expense Ratio (TER), which is expressed as a percentage of a scheme’s net assets.
  • Investor savings - TERs for equity and hybrid schemes start out at 2.5 % of daily average net assets for the first Rs. 100 crores and fall to 1.75 % for all assets beyond Rs. 700 crores.
  • However, in recent times there are some schemes that manage assets of over Rs. 22,000 crores, making these slabs obsolete.
  • Hence, to allow all schemes ranging from a Rs. 700-crore midget to a Rs. 22,000-crore giant to levy the same TER is quite unjust to investors.
  • The slab-based structure had not been revised from the time SEBI introduced its mutual fund regulations in 1996.
  • Under the new rules, the TER ratio will come down once the assets under management of a mutual fund arise.
  • Under the new slabs, open-end equity schemes can charge a maximum of 2.25% for the first Rs. 500 crores of assets, 2% for the next Rs. 250 crores and 1.75% for the next Rs. 1,250 crores.
  •  TERs drop to 1.60 per cent once assets scale up beyond Rs. 2,000 crores.
  • This benefits investors in higher AUMs to make savings in TERs of 30 to 60 basis points under the new slabs.
  • It also curtails the disproportionate financial clout that the top AMCs enjoy over distributors and competitors.
  • Close- ended funds - They lock in investors irrespective of performance, operate to vaguely defined and duplicated mandates and often charge investors at the highest TER slab.
  • By capping the maximum TER for close-ended equity funds at 1.25%, SEBI has now provided strong disincentives for MFs to prefer close-end funds.
  • Ban on upfront commissions – Though forbidden, many AMCs do pay upfront commissions to intermediaries out of their own pocket to push products.
  • SEBI forces MFs to move to an all-trail model for their distributor commissions.
  • Under this, an advisor earns his fee as an annual percentage of his clients’ assets.
  • Thus, if the investor sells funds or his net asset value slumps due to poor performance, the distributor takes a haircut on his earnings too.

What are the negatives for the industry?

  • Ban on upfront commissions could prevent AMCs from using their own profit and losses to reward or incentivise their distribution partners.
  • Though SEBI has been keen to hold MFs to ultra-high standards on costs and transparency, regulators of competing financial products like IRDA still need regulatory tweaking.
  • In regular premium traditional insurance policies, first year commissions of more than 35% to agents are still commonplace.
  • Widening fee differentials between MFs and other products may nudge both AMCs and talented fund managers to abandon MF industry.
  • Also, reduction in TER can squeeze the already poor revenue of individual financial advisors(IFA) who services the retail investor.
  • Declining revenues can turn the business models of many IFAs unviable.
  • This may have direct implications for MF penetration and the quality of MF advice and services received by small investors.

 

Source: Business Line

 

 

Login or Register to Post Comments
There are no reviews yet. Be the first one to review.

ARCHIVES

MONTH/YEARWISE ARCHIVES

Free UPSC Interview Guidance Programme