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Circular on mutual fund scheme mergers soon, says Sebi’s Mahalingam

LiveMint logoLiveMint 29-09-2017 Jayshree P. Upadhyay

Mumbai: The Securities and Exchange Board of India (Sebi) will issue the circular for merging mutual fund (MF) schemes in a week’s time, said G. Mahalingam, whole-time member at the capital markets regulator.

Sebi is also working on streamlining the format for compensating distributors, he added.

“The circular (mandating MF mergers) will be released in a week,” said Mahalingam at Mint’s Mutual Funds Conclave on Thursday. 

The regulator is looking to help investors cut through the clutter of 2,000 investment schemes and aid decision-making after this was suggested by its MF advisory panel.

Mint reported on 11 September that the move will bring down the current schemes by as much as half as the regulator ensures that a fund house has only one product offering in each category.

India currently has 42 fund houses managing around Rs20.6 trillion.

Sebi is also discussing whether to move to a completely advisory-based model for MF distribution, according to Mahalingam.

Currently, intermediaries can register either as an adviser (who gets a fee from the customer) or a distributor (who gets a commission from the fund house). However, distributors are also allowed to give incidental advice. In the last two years, Sebi has released discussion papers questioning whether distributors can be allowed to give advice.

The MF industry also needs to work on reducing the expense ratio, said Mahalingam. 

Expense ratio is the percentage of assets spent to run an MF. A lower expense ratio bodes well for investors. In 2012, Sebi had removed internal sub-limits and allowed fund houses more flexibility in deciding how they wanted to spend the money they received from investors towards the expense ratio. 

“We need to bring down the expense ratio so that we are not edging ahead (higher) of other jurisdictions,” said Mahalingam. 

Under existing norms, the maximum expense that an equity scheme can charge an investor is 2.5%. It is 2.25% for debt funds. According to a 2016 report by investment research firm Morningstar, the total expense ratio in most countries is between 1% and 1.7%, with India and Canada the most expensive at over 2%. 

Mahalingam also said that Sebi is asking MFs to benchmark their schemes against the Total Return Index, which captures dividend income. This, according to him, will give distributors and investors a truer picture of the fund’s performance with respect to the benchmark. 

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