News Hour- Mutual funds investment to turn expensive for existing investors and for those living in metros

MUMBAI: Investing in mutual funds could be an expensive affair for investors residing in metros and top Indian cities. Market regulator Sebi, in its board meeting on Thursday, has devised an incentive formula wherein existing mutual fund investors and those residing in top Indian cities would subsidise for new investors from smaller cities and towns. In its bid to increase mutual fund penetration, Sebi has allowed asset management companies that have managed to bag 30% of their total annual inflows from places beyond top-15 Indian cities to charge an additional 30 bps expense ratio. The 30 bps would be charged on the entire fund, in a way, making existing investors and investors residing in top cities to pay for new investors from the hinterlands. This, in effect, would jack up the expense ratio by 30 bps to 2.55% in the case of funds with assets over Rs 100 crore. Expense ratio is the fee charged by a fund house to manage and operate the fund. The charges include management fees, administrative fees, and other operating costs. Till now, mutual funds were allowed to charge up to 2.25% (in funds with assets in excess of Rs 100 crore) as expense ratio. Currently, of the 2.25% charged as expense ratio, fund houses are allowed to accept only 1% as asset management charges; the remaining 1.25% has to be mandatorily used to meet recurring expenses, which include payment of annual trail fees, auditor & registrar charges and dealing charges to empaneled brokers. Expense ratio fungibility will dissolve cost bifurcations within expense ratio and allow fund houses to charge expenses at will. The regulator has also asked fund houses to plough back exit load to the NAV of the fund. Exit load is a penalty charged on unitholders for redeeming money within a pre-determined period. Till now, fund houses only charged a maximum of 1% as exit load; the rest were ploughed back to the fund. As per the new rule, fund houses will have credit back the entire exit load back to the fund. However, as an incentive, fund houses have been allowed to claw back an additional expense ratio of 20 bps from the overall fund. "This will not result in any additional cost to the investors," said a cleverly-worded press note issued by the regulator. Industry experts, however, finds this unfair as existing investors (investors who are invested in the fund) will have to pay 20bps from the net fund pool. A member of the mutual fund advisory committee, however, clarified saying, "As per Sebi's calculation, total exit load generated by Indian fund industry is around 22 bps.
(Source: economictimes.indiatimes.com)