Market regulator Sebi?s circular released on Thursday evening failed to mention the addition of 20 basis points (bps) to the total expense ratio (TER) and fungibility within TER ? issues that were outlined in its broad guidelines last month and were widely expected to give a leg-up to the ailing mutual fund industry.
Currently, the maximum permissible TER is 2.5% on equity schemes and 2.25% on debt schemes. A higher expense ratio would have given the fund house more leeway to spend money on distribution, marketing and sales expenses. Fungibility, on other hand, could have enabled fund houses to pocket higher AMC fees, which is capped at 1% for equity schemes at present. Market watchers are hoping there?s clarity on the issue soon.
Fund houses have been allowed to charge an additional 30 bps of TER for going beyond the top 15 cities on the condition that the new inflows from beyond top 15 cities are at least 30% of gross new inflows in the scheme or 15% of the average assets under management (year-to-date) of the scheme, whichever is higher. However, the additional TER will be clawed back if inflows from beyond top 15 cities are redeemed within a period of 1 year from the date of investment.
Market watchers believe this additional TER will help fund houses meet the expenses for expanding into tier 2 and tier 3 cities. According to a recent PwC report Is there a silver lining?, the top five cities contributed over 70% of the total AUM, with Mumbai alone accounting for more than 42%.
Fund houses don?t seem to be too happy about the requirement to launch schemes under a single plan to ensure all new investors come under a single expense structure. According to the Sebi circular, even existing schemes with multiple plans based on the amount of investment shall accept fresh subscriptions only under one plan. Currently, there are separate plans for categories such as retail, institutional and super-institutional.
?It will be difficult to merge schemes under one plan since their ticket sizes and expense ratios will be different. Also, institutions might not want to invest in a plan that is clubbed with that of a retail plan and has a higher expense ratio,? said Deepak Chatterjee, CEO, SBI Mutual Fund. He pointed out that fund houses could get around the problem by launching a direct plan meant for institutional investors.
AMCs have been asked to provide a separate plan for direct investments in existing as well as new schemes. The fund houses have been given time till January 1, 2013 to comply with this requirement. Market watchers believe that a lot of high net worth individuals and institutional investors might opt for these plans, which will not be routed through a distributor.
The move is likely to eat into the income of distributors as well as AMCs as the plans will have a lower expense ratio and a separate NAV, and no commission will be paid from such plans. ?This is a big negative for the distributor community. The regulator should have given the flexibility rather than insisting on direct plans,? said Dhruv Mehta, chairman, FIFA, a body of independent financial advisors. ?Today, the reason most manufacturers opt for the distributor model is that mutual fund is a push product and sales through distributors is cheaper than direct sales,? said Mehta.
Sebi has also mandated that the total exposure of debt schemes of mutual funds in a particular sector shall not exceed 30% of the net assets of the scheme. MFs have to annually set aside at least 2 bps on daily net assets within the maximum limit of TER for investor education and awareness initiatives. ?It?s a good move but the 2 basis points requirement should have ideally been restricted to equity funds and not on overall net assets,? said Sanjay Sachdev, president and CEO, Tata Asset Management.
Sebi has also asked for more disclosure from fund houses and distributors. MFs have to disclose portfolio every month on their websites and half-yearly disclosures of their unaudited financial results on their respective website.
