To widen the reach of mutual funds in smaller cities, the Securities and Exchange Board of India (Sebi) is mulling over allowing asset management companies to charge an additional 0.3% of expense fee ? above the 0.25% hike proposed in the total expense ratio ? for Tier-II and Tier-III cities. Currently, the expense ratio is charged at a maximum of 2.5% from investors.
Sebi is also considering asking mutual funds to infuse money raised through levy of exit loads into respective schemes. This would directly benefit the unit holders and reduce incentives for fund houses to promote early exits. A senior finance ministry official, requesting anonymity, said: ?In order to boost overall mutual fund sales, Sebi is considering incentivising sales in the hinterland where penetration levels are low.? The official added that measures proposed by the advisory committee and suggestions given by the ministry will be taken up at the Sebi board meet scheduled in July end.
A mutual fund advisory committee under Sebi, which met on Tuesday, had recommended an increase in expense ratio, the percentage of an investor’s corpus that’s deducted by an asset management company annually to meet its various expenses of equity schemes. To incentivise the fund houses, the committee supported the proposal to raise the expense ratio by 25 basis points to 2.5%.
Dhirendra Kumar, head of Value Research, said, ?It will have a positive impact as incentivising companies for geographical expansion will help expand the reach in smaller cities. The bigger fund houses will benefit as new markets will improve overall sales.?
The committee has also proposed flexibility in using the expense ratio. ?Hiking the expenses would mostly help big fund houses, which have large AUMs. But it would become a sore point with those small fund houses that haven?t enough accumulated money in their schemes,? an industry expert said, requesting not to be named. He said the government should pursue major reforms such as tax benefits to MFs launching pension plans to help the sector.
Sebi is also considering bringing the exit load, the fee charged on investors for selling their units before one year, to be ploughed back into the scheme. By ploughing back the exit load into the scheme, the net asset value improves, benefiting unit holders. At present, the exit load goes to the profit and loss account of the fund house. As a result, the balance sheet gets a boost when more people leave the scheme. On the other hand, existing investors suffer because of the loss in corpus.
