The Securities and Exchange Board of India’s (Sebi) new guidelines for mutual funds became effective from October 1. These guidelines have triggered a flurry of activities as all the stakeholders are busy understanding and implementing them. With the news that a number of schemes have stopped accepting subscription/SIP registration (fresh as well as existing SIP), there are apprehensions being expressed by certain quarters.
In the meantime, Sebi has allowed mutual funds to implement discontinuance of SIP, STP and dividend reinvestments from November 1, 2012 instead of October 1, 2012. The fund houses have already published notices in national as well as local newspapers about various changes/modifications affected by them. Investors who have been investing in schemes with multiple-plans can also find out about the fate of their schemes from the websites of the respective mutual funds.
Here is an attempt to decode some of the guidelines that are likely to impact investors:
Single plan structure of mutual fund schemes
Sebi has made it mandatory for the fund houses to have a single plan under all their schemes i.e. both new as well as existing ones. Consequently, all the new schemes launched by mutual funds will have a single plan and, hence, all investors will be subject to one expense structure. Similarly, existing schemes with multiple-plans based on the amount of investment ( i.e. retail, institutional, super institutional, etc) will now accept subscriptions only under one plan.
Although discontinued plans will not accept fresh subscriptions, the discontinuation of plans will not affect existing investments made by investors in these plans. Investors can redeem their holdings any time. Besides, transactions relating to moving money out of these plans through either a Systematic Transfer Plan (STP) or a Systematic Withdrawal Plan (SWP) will continue to be honoured till an investor has a sufficient balance under the plan.
Re-investment of dividend declared under discontinued plans will be handled differently by fund houses. While some of the mutual funds will allow the dividend declared under the discontinued plans to be reinvested under the retained plan, others will compulsorily payout the dividend, if such an option exists. If not, no dividend will be declared by the scheme under the discontinued plan and the movement in the NAV will be on the lines of a growth option.
It is important for investors to understand that multiple plans exist mostly in debt funds like liquid funds, ultra short term, short term, income and gilt funds. The instances of equity as well equity and debt oriented hybrid funds having multiple plans are very few. In any case, most of the fund houses have decided to retain retail plans under equity and hybrid fund category. Under the debt fund category, it is a mixed bag. In other words, the decision to have a single plan is not likely to impact retail investors in a major way.
In fact, wherever fund houses have reduced minimum investment amount and expenses in the retained plan, it would make sense for investors to move from the discontinued plan into the new plan after considering tax implications..
Applicability of NAV across schemes
Sebi has mandated that for applications with an amount equal to or more than ~ 2 lakh, the applicable Net Asset Value (NAV) will be the closing NAV of the day on which funds are available for utilisation before the cut-off time. Earlier, the applicable NAV used to be the closing NAV of the day on which application was submitted, subject to realisation of the cheque.
There is no change with respect to applicability of the NAV for purchases/ switch-in for amount of less than ~2 lakh. For switch-in transactions of ~ 2 lakh and above, the applicable NAV will be the NAV of the day on which the funds are available for utilisation before the cut-off time, by the respective switch-in scheme.
Total Expense Ratio (TER)
Mutual funds are allowed to charge an additional TER of up to 30 basis points on daily net assets of the scheme, if the new inflows from beyond top 15 cities ( based on Association of Mutual Funds in India (AMFI) data on AUM by geography) are at least (a) 30 per cent of the gross inflows or (b) 15 per cent of the average assets under management (year to date) of the scheme, whichever is higher. In case, inflows from beyond 15 cities are less than the higher of (a) or (b), additional TER will be charged on proportionate basis.
There is also a provision of clawing back the additional TER charged if the money is redeemed within one year from the date of investment. Mutual funds are required to make complete disclosure in the half yearly report of trustees to Sebi regarding the efforts undertaken by them to increase penetration beyond 15 cities.
Mutual funds also have to annually set apart at least 2 basis points on daily net assets within the maximum limit of TER for investor education and awareness initiatives.
The writer CEO, Wiseinvest Advisors
