Industry’s expense ratios increase, though a majority of funds declined more than the Sensex.
A query in mutual fund tracker Value Research’s search engine for ‘all gainers’ for the one-year period ending December 20 fetched a ‘no records’ response. This means most, if not all, MF schemes in the equity category saw no appreciation in their portfolio in the past year.
If one excludes a few global funds and some sectoral ones, which bucked the trend with their limited corpuses, these schemes lost between 10 per cent and 47 per cent. Two-thirds or a little over 250 schemes underperformed the Sensex.
Even as investors suffered such losses in line with the falling equity markets, expenses charged by fund houses have not seen any decrease. In fact, these expenses increased marginally this year. Thus, the only person that made money in 2011 on MFs seems to be Mr Equity Fund Manager.
| ALWAYS A WINNER? | |||
| Sensex year-to-date returns -23.52 | |||
| Most expensive equity schemes |
Expense ratio (%) | ||
| 2010 | 2011 | YTD returns % | |
| Birla Sun Life Long Term Advantage | 3.22 | 3.26 | -25.86 |
| LIC Nomura MF India Vision | 2.37 | 2.52 | -32.14 |
| AIG Infra & Economic Reform Reg | 2.10 | 2.50 | -21.77 |
| Baroda Pioneer ELSS 96 | 2.50 | 2.50 | -30.22 |
| Baroda Pioneer Growth | 2.50 | 2.50 | -31.38 |
| Baroda Pioneer Infrastructure | 2.50 | 2.50 | -36.74 |
| Baroda Pioneer PSU Equity |
NA | ||
10 largest schemes
Rs crore
ratio %
returns %
Fee income
According to data provided by Value Research, the average expense ratio of 385 equity schemes at the end of September went up to 2.06 per cent from 2.03 per cent last year. On a weighted average basis, Rs 1.82 lakh crore in these schemes was managed at an expense ratio of 1.98 per cent. For 2010, this figure was 1.95 per cent. That is, in addition to the losses on account of the market crash, MF investors paid close to Rs 3,600 crore as expenses to fund houses. Assuming half of this went to the latter, which are allowed to charge up to 1.25 per cent as investment management fee, the 44 fund managers in the country would have made Rs 1,800 crore in fee income.
The expense ratio refers to the percentage of the fund’s assets that go purely toward the expense of running the fund. At present, Securities and Exchange Board of India regulations permit equity funds to charge as expenses up to 2.5 per cent of their average daily net assets for the first Rs 100 crore of assets, 2.25 per cent for the next Rs 300 crore, two per cent for the next Rs 300 crore and 1.75 per cent for higher amounts. So, as the corpus increases, the expense cap falls. Over half or up to 1.25 per cent can be charged by the fund house as investment advisory fee. From the rest, the fund meets the administrative costs, distribution fees and other operating expenses.
Hemant Rustagi, CEO, Wiseinvest Advisors, attributed the overall rise in expenses to the entry of new schemes. “It could be mainly because of new funds, which are charging higher. However, in absolute terms, we need to see how much is going to fund houses. I believe that is on the decline.”
Assets under management of these equity schemes have fallen from Rs 2.11 lakh crore last year. However, eight of 10 large schemes, which managed over Rs 3,000 crore in assets each, saw their corpus go up this year. These schemes charged between 1.45 per cent and 2.23 per cent annually. Half of these large schemes trailed the Sensex year-to-date returns of a negative 23.52 per cent. Among the 10 most expensive schemes, only one scheme performed better than the Sensex. It lost 21 per cent this year. The other nine lost between 24 per cent and 37 per cent.
Dhruva Raj Chatterji, senior analyst at Morningstar India, said: “If there is a rise in the expense ratio, it would help the fund houses.” He said fund houses might be trying to make up the increase in costs, as many are paying for up-front commissions from their pockets and reserves are on the decline. “But this does not mean that when equity markets rally, fund houses increase the expense ratio.”
