India’s equity schemes among most expensive in the world

Study says country among top 25 countries in terms of fees and expenses

Despite the cap on upfront commission, domestic equity schemes fall in the most expensive of global brackets. India’s is among the top 25 countries in terms of fees and expenses for equity and allocation funds, shows a study by fund tracker Morningstar.

It grades India as ‘ below average’ on the ‘ fees and expenses’ parameter. The calculations look at asset weighted median fees in the major asset classes of equity, fixed income and asset allocation.

“The situation is not unusual ,given the developing nature of the Indian fund market and the impact this has on scale and distribution,” the study says.

Indian investors do not pay front loads when acquiring funds, and the expense ratios for fixed income funds are globally competitive. India also prohibits funds from charging of performance fees, which removes issues around their structuring and disclosure. And, the Association of Mutual Funds in India (Amfi) had capped upfront commissions at 100 basis points in 2015.

Markets regulator Securities and Exchange Board of India (Sebi) has been deliberating for some time on reducing the total expense ratio charged by mutual funds.

“Today, if you look at the TER (total expense ratio) of the Indian MF industry, it is far more than comfortable, compared with many other jurisdictions. With volumes improving, we must now examine if we can bring down the TER. This is a good time when the industry can really think of shrinking its margins, attract more retail (small) investors in their fold and gain a little more traction,” Sebi wholetime member G Mahalingam had said at a recent event.

TER is the annual charge deducted from the net asset value of a scheme. It typically covers management & advisory fees, audit fees, custodian fees, registrar & transfer agent fees and brokerage fees.

Manoj Nagpal, chief executive of Outlook Asia Capital, says the expense ratios charged by Indian fund houses are not strictly comparable to those in other developed markets. “The expense ratio charged by Indian MFs is an all-inclusive cost. In several developed markets, on the other hand, costs such as custodian and platform fees are not included in the overall fees charged to investors.”

In the past, distributors have disputed the findings of Morningstar. For instance, in the latter's study for 2015, the TER for equity funds in India was 2.65 per cent. However, a study done by the distributor body, Foundation of Independent Financial Advisors, recalculated the TER as 2.07 per cent (1.81 per cent before service tax), after accounting for factors such as advisory and platform fees. This made India the fifth-least expensive jurisdiction among the 25 countries under the Morningstar study.

The 2007 Morningstar India study has retained a grade of ‘average’ for India with regard to MF regulation and taxation. “India matches global best practices in many areas of regulation. India is one of only a handful of countries in this study that continue to have capital controls limiting the amount funds can invest in foreign securities. The tax system provides incentives for fund investing, including the deferral of capital gains tax until units are sold,” the study observes.

India earned a ‘top’ grade for its disclosures and is the only other country apart from the US to earn this grade. “Transparency of portfolio holdings remains the best of any market, with monthly disclosure required and those portfolios typically released after 10 days. It is now mandatory for asset managers to disclose fund manager compensation levels as well as manager investments in their funds,” the study says.