The Securities and Exchange Board of India (Sebi) has permitted India’s ailing fund houses to charge an additional 50 basis point (bps) as total expense ratio (TER), raising the permissible limit to three percentage points. The capital markets regulator also allowed fund houses to have fungibility on the TER to bring about cost effectiveness.
Fund houses can charge an additional 20 bps across the board. However, for assets from cities other than the top 15 ones, they are eligible to charge another 30 bps, provided inflow from these Tier-II & Tier-III cities account for 30 per cent of the overall assets.
“To improve the geographical reach of mutual funds and bring in long-term money from smaller towns, asset management companies (AMCs) are allowed to charge additional TER (up to 30 bps), depending on the extent of new inflows from locations other than the top 15 cities. AMCs would be able to charge 30 bps if the new inflow from these cities/towns are up to 30 per cent of the total inflow. In case the inflow is less, the proportionate amount would be allowed as additional TER,” read a Sebi statement.
Currently, the maximum permissible TER is 2.5 per cent on equity products and 2.25 per cent on debt funds. The industry’s average TER across the board stands at about 1.95 per cent.
The service tax (11.36 per cent) on the expense ratio would now have to be borne by investors, not fund houses. According to Sebi Chairman U K Sinha, this would lead to an additional three-bp cost for customers.
To encourage long-term holding and reduce churn, Sebi said entire exit loads would be credited to the scheme, while AMCs would be able to charge an additional TER of up to 20 bps. “This will not result in any additional cost to investors,” the statement added. “Currently, 20 per cent of the assets is redeemed in less than a year,” said Sinha.
Chief executives across the industry said Thursday’s announcements were game-changing, but added it would take time for the changes to sink in. Jaideep Bhattacharya, managing director of Baroda Pioneer MF, said, “AMCs did not think it necessary to set up operations beyond 15 cities, as it was not economical. But money flowing from cities other than these is stickier in nature. Mutual fund is a push-product, and unless distributors are motivated, penetration would remain low.”
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Other executives agree. They say such fungibility of TER would encourage AMCs to look beyond top cities. Puneet Chaddha, chief executive of HSBC MF, said, “These are structural changes for the industry for long-term growth. Distributors’ payouts are now linked to the persistency of assets.”
Fungibility of TER, along with shifting the service tax burden to investors, would be beneficial for AMCs. “After allowing us to have flexibility on TER, it is up to AMCs to manage our costs. It will help us in adding to our revenue,” said another chief executive.
Sinha said for the long term, Sebi had constituted a committee, and this would give its recommendations in six months.