MFs raise expenses for liquid funds

Top houses decide to increase these to 20 bps from this month; many schemes were charging as little as 2 bps, leading to losses

The Rs 9 lakh crore mutual fund (MF) sector has finally decided to increase the expense ratio for liquid schemes – which have attracted the largest amount of short-term money, of Rs 2.5 lakh crore – to 20 basis point (bps).

According to sector sources, the top 10-15 fund houses have come together and decided to charge 20 bps from February. “While there is no written understanding, we decided it’s time, so that schemes do not incur losses,” said the chief executive officer (CEO) of an MF who was  part of these discussions. Many fund houses were charging as little as 2-5 bps in their liquid schemes. The decision comes at a time when liquid funds have been driving the sector’s growth. As a recent CRISIL report noted, the assets of MFs rose to Rs 9.03 lakh crore in January, primarily because of the increase in liquid assets by 43 per cent or Rs 77,500 crore (total increase in assets was Rs 83,000 crore). Liquid or money market funds account for slightly less than a third of the entire MF sector’s assets.

The move makes sense, said experts. After the September guidelines of the Securities and Exchange Board of India, where it said mutual fund/asset management companies would have to set aside two bps on daily net assets for investor education and awareness, one wonders how fund houses were able to keep charging 2-5 bps as expenses. Clearly, schemes couldn’t afford to charge so little and still be profitable.

Added another CEO: “To construct a liquid fund, the cost is as high as 10-20 bps, making it almost impossible for fund houses to run schemes with a lower expense ratio.”

A sector player said the decision would help the fund houses improve their profits as well. Many have high assets but have not been very profitable because in the race to collect assets, they lose on profits. Leo Puri, chairman, UTI MF, at its recently-held 50th anniversary function, said the entire MF sector’s annual profit of a little less than Rs 1,000 crore was much lower than HDFC Bank’s one quarter of profit at Rs 2,326 crore (the last quarter).  

The number of folios in the sector has been declining consistently in recent years. In fact, the net loss in these over FY14 has been three million; it was 3.6 million in FY13. On the other hand, the assets have been rising consistently, indicating fund houses were getting large amounts from companies and high net worth individuals, instead of adding more retail investors.