SEBI To Review Fees, Expenses Charged By Mutual Funds
SEBI could focus on rising distribution costs as percentage of total expense ratio of MF schemes.
The Securities and Exchange Board of India has initiated a study of the regulations pertaining to the fees and expenses in mutual fund schemes.
"The study shall endeavour to provide data as input for policy formulations," SEBI said in a notification on its website. "The policies, as always, would seek to balance the need for facilitating financial inclusion, encouraging new participants, leveraging economies of scale, encouraging adoption of technology, discouraging cross-subsidization across schemes, closing arbitrage opportunities if any, and curbing malpractices, if any."
According to Kotak Institutional Equities, it's too early to determine the impact of SEBI's study, but it expects the regulatory action to focus on the distribution side of the business instead of a large-scale reduction in expense ratios.
The charges levied by a mutual fund for managing a scheme are described as the "Total Expense Ratio" or TER. This is calculated as a percentage of the scheme’s net asset value. On a daily basis, the net asset value of a scheme is updated and disclosed after deducting the TER.
Regulations by the market regulator currently cap the TER that can be charged on any scheme. This is done on the basis of the assets under management in a scheme. As the assets under management of a scheme rise, the maximum TER chargeable progressively reduces.
For example, equity schemes with assets under management of over Rs 50,000 crore have a maximum TER of 1.05%.
The TER is fungible. That is, there is no limit on any of its components as long as the TER as a whole is within the prescribed limits.
Scrutiny Of Distribution Pay-Outs Likely
SEBI is also likely to pay close attention to the cost of distribution of mutual fund schemes, according to Kotak Institutional Equities Research.
"Distributor pay-out has been rising in the last few years, as seen in the share of distributor commissions rising to around 55% of the expense ratio compared to around 45% three years ago," it said in a report. "After the ban on upfront commissions, distributor profitability has recovered well, with revenue growth at 30% CAGR since FY2019 versus around 15% for AMCs."