Hav­ing mul­ti­ple schemes helps fund houses to earn higher fees ow­ing to the AUM-based lay­ered fee struc­ture

The Economic Times - - Companies -

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.

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