SEBI TO FOCUS ON MERGER OF MF SCHEMES
The Securities and Exchange Board of India (Sebi) is pushing mutual funds to merge common schemes, cut high expenses charged to investors and benchmarking schemes, said G. Mahalingam, a whole-time member at the capital markets regulator on Wednesday.
Sebi is looking to enact laws on this, which will mark the next set of reforms after 2012 when it introduced direct plans (which allow investors to buy directly from fund houses and save on broker commissions) and allowed fungibility of expense ratio (removing the internal sublimits within the expense ratio).
Forty two asset management companies in India cumulatively manage nearly ₹20 lakh crore spread across 2000 schemes, which according to the regulator, is disproportionately high.
Sebi is looking to ease merging mutual fund schemes by clearly defining schemes into categories such as debt, equity or hybrid funds.
“The regulator has been asking the industry to consolidate its schemes but the industry is yet to take steps in that direction. A balanced fund should be truly balanced in nature, we don’t want investors to regret later that they went by nomenclature and the fund wasn’t balanced at all,” said Mahalingam. “If a fund is dealing in debt, then it should be called as debt fund.”
Currently, Sebi nomenclature rules for mutual funds loosely define just two aspects - whether a fund is open-ended or close ended and whether it invests in equity or debt.
“A clearer definition would prevent duplication of funds of similar nature and help investors make informed decision,” said Manoj Nagpal, managing director and chief executive officer, Outlook Asia Capital.
According to Sebi’s Mahalingam, mutual funds should cut their expense ratio as assets are growing at a fast pace.
“This is a good time for the industry to shrink its profits, bring in more investors into their fold”, said Mahalingam.
Under existing norms, the maximum expense that an equity scheme can charge to an investor is 2.5% of assets managed ; this 2.25% for debt funds. The rate is applicable in slabs and a fund house is allowed to charge 2.5% for the first ₹100 crore in weekly average net assets of a scheme. For the next ₹300 crore, a total expense ratio of 2.25% can be charged. For anything beyond that, fund houses can charge an expense ratio 1.75%.
According to a 2016 Morningstar report, the total expense ratio expenses in most countries fall between 1% and 1.70%, with India and Canada, the most expensive at over 2%.
According to Nagpal, the expense ratio is higher because mutual funds use the leeway available to them to charge more. Current norms allow funds to charge 20 basis points (of assets managed) instead of charging any exit fees and another 30 basis points as expenses for canvassing investors from smaller towns. One basis point is one-hundredth of a percentage point.
“The 20 basis points is supposed to be compensatory in nature but data suggests something else. As of 2016, the 20 basis points allowed to be charged in lieu of the exit load helped fund houses earn ₹350 crore; only ₹75-80 crore was credited back to the scheme. In addition the 30 basis points allowed for penetration is charged to the entire assets under management, when it should be limited to only assets coming from smaller cities.”
Sebi is also asking mutual funds to benchmark their schemes against Total Return Index (TRI), a benchmark that captures dividend income.
This, according to Mahalingam, will give distributors and investors a truer picture of the fund performance with respect to the benchmark. Unlike traditional benchmarks which do not account for dividend income, TRI includes interest, capital gains, and dividends realised over a period of time. Currently, only DSP BlackRock Mutual Fund and Edelweiss Mutual Fund benchmark their schemes to TRI.