New expense norms reduce costs of large mutual funds schemes

A number of large schemes have significantly reduced their total expense ratios (TERs) after April 1, in keeping with the regulatory diktat of slab-wise reduction in scheme expenses — a move that is set to benefit investors.

Of the 25 largest schemes taken into consideration by way of assets they manage, half have seen a reduction in TER of greater than 20 basis points (bps), the data collated from Value Research shows. Of the 12, four manage assets of over Rs 20,000 crore, while another three manage assets between Rs 10,000 crore and Rs 16,000 crore.

ICICI Prudential Bluechip Fund and ICICI Prudential Value Discovery have seen the maximum reduction in TER to the tune of 56 bps and 50 bps, respectively.

All things being equal, the reduction will benefit the scheme returns to the extent of the cut in TER, said experts. This could prove beneficial at a time when diversified equity schemes have been struggling to beat their benchmarks.

“A reduction of 25 bps may not seem very large, but it is quite significant over long periods of time,” said Kaustubh Belapurkar, director, fund research, Morningstar Investment Adviser India.

A study of 384 equity schemes that includes direct plans shows that 62 per cent have underperformed their respective benchmarks in 2018-19, the data from Value Research shows.

A separate study released by S&P Dow Jones Indices revealed that 92 per cent of large-cap equity funds and 26 per cent of mid- and small-cap equity funds had underperformed their respective indices over a one-year period ended December 2018.

Theoretically, direct investors should benefit more, as the percentage of TER cut could be higher than regular plans. For instance, assume the fees for direct and regular plans for a particular scheme was 100 bps and 200 bps, respectively. After April 1, the former will see a 25 per cent cut in TER, while the latter’s expenses will reduce by 12.5 per cent, provided the scheme cuts expenses uniformly by 25 bps.

The exact impact of the cut in TER on direct plans, however, will depend on the quantum of TER cut the fund houses pass on to the distributors. The steep reduction in TER for the larger schemes could prompt distributors to move assets to smaller schemes. Conversely, lower costs could attract savvy investors to such schemes, further ballooning the asset size of these schemes.

“Large schemes may have a significantly lower TER, prompting high networth individuals to move money there. The increase in assets, in turn, may make it more difficult for these schemes to outperform,” said Amol Joshi, a distributor. 

Last year, brokerage CLSA had observed that the cut in TERs could have a 25 per cent impact on the earnings of asset management companies.