Investing in mutual funds to become cheaper on Sebi move; AMC margins may be affected, say experts

New Delhi: Investing in mutual funds will become cheaper, while margins of asset management companies may get affected due to regulator Sebi's move to slash the charges levied on investors, experts said Wednesday.

In a major overhaul of the fee structure of mutual funds, Sebi on Tuesday cleared a proposal to cap the maximum total expense ratio (TER) -- the fee that MFs collect from investors every year to manage their capital -- for closed-ended equity schemes at 1.25 percent and for other schemes at 1 percent.

The maximum TER for open-ended equity schemes will be 2.25 percent and 2 percent for other open-ended schemes.

"TER has come down and even slabs of AUM have been changed. In my view, it will definitely benefit investors as the costs of investing in mutual funds will come down. All these steps will also lead to more transparency in the industry," Quantum Asset Management CEO Jimmy Patel said.

G Pradeep Kumar, CEO of Union AMC said the review of expense ratios by Sebi reflects the principle that as individual schemes get larger, the economies of scale should be shared with the investors.

Representational image. Reuters

Representational image. Reuters

"The margins of AMCs running some of the very large equity or balanced schemes may get affected but hopefully, volumes will make up for it," he said. For AMCs with relatively smaller schemes, the impact will be limited, he added.

Anurag Garg, CEO and Founder, Nivesh.com believes that the reduction in TER and creating a graded structure where schemes with smaller AUMs can charge higher TER will reduce inflows into the celebrated or flagship schemes and benefit mid-sized players. This will also lead to some reduction (15 to 20 basis points) in distributor commissions, he added.

"As costs go down, the net return of funds increase thereby making mutual funds an even more attractive option for the investor. Though care should be taken to ensure that costs are not lowered to an extent where the industry is unable to attract and pay for quality talent," Stefan Groening, Director Investment Solutions, Sharekhan, BNP Paribas said.

In a bid to pass on the economies of scale to investors, Sebi has reduced the expense ratio of funds across categories, Morningstar said in a report.

From Rs 79,501 crore in July 1999, the industry has grown at a compounded annual growth rate (CAGR) of 20 percent to reach Rs 25.20 lakh crore in August 2018.

The expense ratio slabs were introduced in 1996 which have not been changed since then, which means that the expenses have not reduced commensurate with the growth of the industry.

Apart from this, Sebi said the industry must adopt full trail model of commission in all schemes, "without payment of any upfront commission or upfronting of any trail commission".

A trail-fee model benefits distributors if their clients stay invested in schemes for a longer period.

At present, mutual funds pay distributors upfront commission as high as 2 percent against the 1 percent recommended by industry body Association of Mutual Funds in India  (Amfi).

"Going for full trail commission will provide an annuitised payout for serious distributors. However, small independent financial advisors may have to adjust their cash flows accordingly," Patel noted.

"A large number of distributors are already operating on trail fee model and systematic investment plans (SIPs) constitute a large chunk of the flows for AMCs and the distributors," Kumar noted.


Updated Date: Sep 20, 2018 11:10 AM

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