Sebi axe likely on MF fee structure

The Securities and Exchange Board of India (Sebi) is looking at reducing the fees of all mutual fund schemes "" equity funds (open- and close-ended), debt funds, index funds and even funds of funds (or FoFs, mutual funds that invest in mutual funds).

Industry sources said the market regulator had a round of discussions with the Association of Mutual Funds in India (AMFI) and other market participants on the issue. Another meeting is scheduled next week at which AMFI is expected to make suggestions on new fee structures.

A first step in this exercise was Sebi's proposal in August to scrap the entry-load payment on open-ended schemes that are bought through online applications or directly through asset management company collection centres instead of distributors.
 

MUTUAL INTERESTS (Current fee structure of mutual funds)
Open-ended equity schemes
Entry load	2- 2.5
Annual recurring  expenses	1.75-2.5
Exit load	0.5 -1
Close-ended schemes
Initial issue  expenses*	6
Annual recurring expenses	1.75-2.5
Exit load	Unamortised expenses
*No entry load, amount is amortised over a period. (Figures in % of amount invested)

The proposal was open for public comment till September 12. The mutual fund industry has submitted its response to Sebi, which has not come out with a new directive yet. But sources said there was a strong possibility that the entry load would be scrapped for investors buying open-ended funds directly.

At present, open-ended mutual fund schemes charge between 2 and 2.5 per cent of the amount invested as entry load to cover sales, marketing and other expenses. Close-ended schemes, on the other hand, are permitted to charge up to 6 per cent as initial issue expenses that are amortised over the life of the scheme.

Initial issue expense is higher because marketing these schemes is difficult, given their lock-in period. In fact, the market saw a flurry of close-ended schemes following this move as distributors found them more viable than open-ended schemes.

Both schemes also charge annual recurring expenses (see table). Annual expenses for equity schemes (administrative, registrar and custodian fees and so on) range from 1.75-2.5 per cent. The exit load for open-ended schemes for six months to one year is 0.5-1 per cent.

Investors in open-ended schemes typically recover the entry load costs when the scheme's net asset value (NAV) appreciates.

This, however, means the NAV must appreciate at least 2.5 per cent for an investor to cover his costs. For close-ended funds, investors don't feel the pinch immediately since the expenses are amortised but the total load is still high.

The move to rationalise the fee structure of mutual funds may be welcomed by investors but not by the Rs 500,000 crore mutual fund industry.

"This move could hamper the growth of the mutual fund industry because it will make it unviable for asset management companies, which are competing with the unit-linked insurance policies of insurance companies that charge very high fees, to cover their expenses," said a senior official with a fund house.