Investing in equity mutual funds may get cheaper

Investing in equity mutual funds may get cheaper

Investing in equity mutual funds is set to get cheaper. The Securities and Exchange Board of India may soon ask mutual funds to cut an expense fee they charge investors and this will be taken up in the next Sebi board meet on March 28. Along with the recently-introduced separate fee restriction for selling schemes in smaller towns this could end up reducing cost of investing in equity mutual fund schemes by as much as 20%. 

The mutual fund industry is now allowed to charge 20 basis points to every scheme. This was introduced in 2012 as compensation for the loss that the industry incurred for not being allowed to use the proceeds they made from exit loads — a fee that mutual funds charged investors for premature withdrawal. 

Now, Sebi wants to reduce this fee of 20 basis points to 5 basis points. The proposal was discussed in the Mutual Fund Advisory Committee, appointed by the regulator, held late in February, said three people familiar with the matter. “Sebi is of the view that 20 basis points for this purpose is too high. It felt that this fee has to be brought down to 5 basis points to reduce the overall cost of investing in equity mutual funds,” said one of the three people quoted above. 

The plan comes close on the heels of a recent decision by Sebi to link another fee to inflows from smaller towns. Currently, mutual funds are allowed to charge an additional 30 basis points of the scheme corpus if fresh inflows from towns beyond the top 15 cities are at least 30% of gross fresh inflows or constitute 15% of the scheme’s average assets. The latest circular applicable from April 01 had made it mandatory for fund houses to gather these flows from towns beyond the top 30 cities for them to charge 30 basis points. 

Industry executives said none of assets managers in the 42-member-strong domestic mutual fund industry meet this criteria fully. “In a way, it was a master stroke to reduce the total expense ratio because no fund house will be able to meet this,” said the chief executive with a large mutual fund. 

Total expense ratio is the amount that mutual funds charge investors to manage their money. The average total expense ratio for most equity funds are in the range of 2.25%-2.50% every year depending on the size of the scheme. Bigger schemes mostly charge lower total expense ratio. The proposal to cut the fee from 20 basis points to 5 basis points and the restrictions to charge 30 basis points will reduce the total expense ratio by 30-45 basis points. This means a scheme, whose expense ratio is 2.25%, may have to lower the total annual fee to as low as 1.8%. 

The moves will lower cost for investors but will deal a double whammy to the mutual fund industry with assets under management of Rs 22,00,000 crore. Industry executives estimate open ended equity schemes manage roughly Rs 600,000 crore of investor money. If the total expense ratio is lowered by 45 basis, the revenue loss for the industry could be as much as Rs 2,700 crore. Industry executives said the moves are likely to result in lower commissions for mutual fund distributors too. 

“Mutual funds will be left with no choice but to pass on some of the pain to distributors. Else, our margins will be hit badly,” said the chief executive with a large mutual fund quoted above. 

The Economic Times, New Delhi, 15th March 2018