Having multiple schemes helps fund houses to earn higher fees owing to the AUM-based layered fee structure
Mumbai: Market watchdog Securities and Exchange Board of India (Sebi) is cajoling fund houses to consolidate schemes and avoid duplication within the same fund category.However,fundhousesmay not be in any mood to oblige. This is because having multiple schemes, particularly in lower AUM (asset undermanagement)brackets,helps fund houses to earn higher fees owing to the current AUM-based layered fee structure.
Consider the example of a fund house that has five small-sized equity schemes with a corpus of ₹ 400 crore each. Under current guidelines, equity funds are allowed to
charge 2.5% for the first ₹ 100 crore, 2.25% for the next ₹ 300 crore, 2% for the subsequent ₹ 300 crore, and 1.75% for the balance assets. Debt mutual funds can charge 25 bps less.
So a fund house can charge ₹ 9.25 crore as expenses for each equity scheme (ie total earning of ₹ 46.25 crore). But if the fund house merges all these schemes into a single ₹ 2,000 crore scheme, it can only charge ₹ 38 crore as expenses.
The table shows the top 10 fund houses with the largest number of open ended equity schemes in their portfolio and the distribution of these schemes under the different AUM buckets. In all, 39 fund companies offer a staggering 416 equity schemes among them — including diversified equity funds, sector and thematic funds and international funds—andmorethanhalf of these schemes (266) have a corpus not more than ₹ 400 crore.
Clearly, there is scope for scheme consolidation which would take away a lot of the confusion for investors. However, unless a uniform fee structure is introduced on all schemes, fund companies are not likely to rationalise the product suite.