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.
