Reformed to the advantage of you and me
Dec 09 2012
The industry, which was bearing the brunt of the entry load ban for the past two years, got some breather after Sebi this year proposed to remove the sub-limits on expenses, giving AMCs the freedom to allocate the 2.5 per cent expense ratio the way they want to.
This fungibility will give fund houses full flexibility to use the total expense ratio (TER) the way they wish to structure it. AMCs will now have a free hand since detailed disclosures of costs incurred, other than management fee, will not be given.
Further, in a move to encourage long-term holding, all AMCs would also have to now plough back their entire exit loads net of service tax into the scheme during redemption. Since the purpose of charging exit load is to protect the interest of continuing investors in the scheme in the case of redemption, the same is not meant to be used for defraying distribution costs. To enable the mutual fund industry to be in line with all other industries, where service tax (12.36 per cent) is borne by end users, Sebi has decided that the service tax payable on investment management fees should be charged to the scheme and be borne by investors over and above the TER of 2.70 per cent or 3 per cent as the case maybe.
However at Quantum Mutual Fund, we have neither increased our current expense ratio nor plan to charge our investors any additional service tax.
In a move to encourage transparency, Sebi has asked fund houses to host a soft copy of its unaudited financial results on its website, within one month from the close of each half year, that is on March 31 and September 30.
Further, AMCs are now required to disclose the monthly portfolios of their schemes on their websites.
There are also some prudential limits and disclosures on portfolio concentration risk in debt-oriented mutual fund schemes. Debt fund schemes are restricted from investing more than 30 per cent of their net assets in a particular sector.
Further to these changes, Sebi has mooted the idea of different plans for direct investors in a scheme with lower expense ratio. This is a very positive step for the benefit of investors. Investors are known to do their research and know which funds they wish to invest in. They do not need to unnecessarily pay large sums to distributors only for filling in forms. And the lower the cost, the more of the investor’s money finds its way into the market to try and generate returns.
Another measure that Sebi has introduced is categorisation of various funds under predefined label. This will help consolidate myriad funds under predefined categories, making it easier for investors to evaluate their investment options.
The mutual fund industry is going through a phase of consolidation, where some of the relatively smaller fund houses are looking to exit India and some of the larger Indian players are looking to offload stakes. This may continue in the coming year.
The measures announced by Sebi reflect an effort to address some of the challenges faced by the mutual fund industry. Sebi has, in the past, introduced many investor-friendly measures, like the abolition of entry loads for all investments. We believe over a period of time, Sebi should take care that the benefits of its measures are not misused in terms of misselling or churning to get more corpus, which can have a bad impact on the overall industry. If these regulations are implemented in right spirit, 2013 could be a better year for the mutual fund industry and investors alike. zz