Why in news?
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.
Source: Business Standard