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Sebi to focus on merger of mutual fund schemes, reducing fees

LiveMint logoLiveMint 06-09-2017 Jayshree P. Upadhyay

Mumbai: With the Indian mutual fund industry managing Rs19.5 trillion in assets across 2,000 schemes, capital markets regulator Securities and Exchange Board of India (Sebi) is working on three primary reforms or regulations. These are merger of mutual fund schemes, high expenses charged to investors and benchmarking of mutual fund schemes, said G. Mahalingam, whole-time member of Sebi at the capital markets summit organised by FICCI in Mumbai on Wednesday.

Merger of mutual funds: Mutual funds consolidation of schemes is in the works. The nomenclature would be ironed out into debt, equity and hybrid funds. “If a fund is dealing in debt, then it should be called as debt fund,” said Mahalingam.

Expenses charged to the scheme: The total expense ratio (TER), or the sum of all fees charged by an asset management company (AMC) for managing investor money. According to Mahalingam, TER of mutual funds in India is far more higher than comfort level, and Sebi is looking whether it can come down.

Under the existing norms, the maximum expense that an equity scheme can charge to an investor is 2.5% (2.25% for debt funds). The rate is applicable in slabs and an AMC is allowed to charge 2.5% for the first Rs100 crore in weekly average net assets of a scheme. For the next Rs300 crore, a total expense ratio of 2.25% can be charged, while AMCs can only charge a TER of 1.75% for anything beyond that.

“Most countries fall between 1% and 1.70% for asset-weighted expenses for allocation funds, with India and Canada the most expensive at over 2%. Unfortunately, Indian funds still have average to expensive expense ratios overall for equity and allocation funds. We find it surprising that equity and allocation funds have asset-weighted expense ratios above 2%,” said a Morningstar report issued in 2016.

Benchmarking of returns: Sebi is asking mutual funds to benchmark their schemes against Total Return Index (TRI), a benchmark that captures dividend income. This, according to Mahalingam, will give distributors and investors a truer picture of the fund performance with respect to the benchmark.

Unlike traditional benchmarks which do not take into account dividend income, TRI includes interest, capital gains, dividends and distributions realized over a given period of time. Simply put, TRI takes into account the dividends from companies that is reinvested.

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