The proposed finance ministry move to incentivise the mutual fund industry by allowing it to raise the expense ratio by 0.25 per cent is likely to put a Rs 450-crore annual burden on investors of equity schemes, but will do little to help small distributors or fund houses in their struggle to cope with bearish market conditions.
For, 88 per cent of the proposed rise would be cornered by the top dozen fund houses. Eleven of these make profits. According to data provided by mutual fund tracker Value Research, these fund houses control a whopping Rs 1.63 lakh crore or 90 per cent of equity assets in the industry. As of June 30, total equity assets of the 44 MFs in the sector were Rs 1.8 lakh crore.
The expense ratio is the amount a fund house charges its investors to meet operating expenses, asset management fees, administration expenses and other asset-based costs. It is expressed as a percentage of the total investment. At present, this is capped by the regulator at 2.25 per cent for equity funds. This is proposed to be increased by 0.25 per cent, to 2.5 per cent. An MF advisory committee of the Securities and Exchange Board of India is likely to take a final decision on the proposal next week.
| TOP GAINERS Major gainers if expense ratio increased on all assets | ||
| Mutual Fund | Equity assets (in Rs cr) | Expected gain from expense ratio hike |
| HDFC Mutual Fund | 30,694.69 | 76.74 |
| Reliance Mutual Fund | 26,514.93 | 66.29 |
| UTI Mutual Fund | 19,900.18 | 49.75 |
| ICICI Prudential Mutual Fund | 15,027.77 | 37.57 |
| SBI Mutual Fund | 14,123.78 | 35.31 |
| Franklin Templeton Mutual Fund | 13,162.70 | 32.91 |
| DSP BlackRock Mutual Fund | 11,872.88 | 29.68 |
| Birla Sun Life Mutual Fund | 9,856.97 | 24.64 |
| Sundaram Mutual Fund | 6,884.66 | 17.21 |
| Fidelity Mutual Fund | 5,568.81 | 13.92 |
| IDFC Mutual Fund | 5,000.35 | 12.5 |
| Tata Mutual Fund | 4,425.75 | 11.06 |
| Total |
163,033.48 | |
Source: BS Analysis of Valueresearch data
If it is approved, the 32 weaker players, with equity assets of Rs 3,000 crore or less, all struggling to make ends meet and sitting on losses, will see their annual earnings increase by a combined Rs 50 crore. The bottom 10 will earn just Rs 1.17 crore between them.
Small fund houses say the proposal for a blanket increase in the expense ratio is being pushed by the larger ones and they are against this. “Industry bodies are dominated by the larger fund houses. A blanket increase is going to increase the profitability of these top players,” said the chief executive of a foreign fund house, which entered the industry recently.
He said any such increase would not get passed on to distributors or result in growth of retail assets. “It will benefit a select few and, in the process, create more problems for the small constituency it ostensibly addresses,” he felt.
If the measure has to be fair, the increase should be calibrated, with only funds gathered from Tier-II and Tier-III cities/towns be allowed to charge the extra expense ratio, the official said. Adding, “The expense ratio increase should not be applicable to investors who have already invested. The move should be made with prospective effect.”
Some experts also fear the move, instead of bringing in new investors, might become counter-productive alienating even the existing ones to drive them to look for better investment options. A K Narayan, president, TamilNadu Investors’ Association, said: “Increasing the expense ratio for existing investors is not a good idea. This will push them out of the industry.”
