Recently
SEBI’s mutual fund advisory panel recommended raising expenses limit by 25
basis points and is likely to be approved by SEBI chief. At present equity
funds are allowed to charge up to 2.50% on first 100 crores, 2.25% on the next
300 crores, 2.00% on the next 300 crores and 1.75% on the balance AUM.. Debt
funds are also likewise allowed to charge under the same slab but the charges
are lower by 25 basis points for each slab. Now the charges will be increased
by 25 basis point for each slab. Let us now try to understand the impact of
this decision on mutual fund investment.
First
let us go back and understand the major changes effected in mutual fund
charges. SEBI banned entry load on equity schemes of mutual fund w.e.f. 1st
August’ 2009. The move was brought in together with the option to the investor
to decide on payment of commissions to distributors on the basis of quality of
advice and service given to him. This has hit the mutual fund industry very
badly and the volumes have come down drastically after that. The total strength
of the mutual fund distributors has also reduced in the meantime to half, as
large number of distributors exited the distribution channel due to
insignificant incentives. Investors were
also not ready to pay extra fees directly to distributor as it was difficult
for them to digest the idea of having to pay an agent by separate cheque. The
inventors were fine with the product being loaded with any charge as long as he
did not have to shell out any money separately. Banks and corporate
distributors benefited the most as the competition reduced. We have just read
the news that 63% of the total commission is paid to 25 larger distributors and
out of that 12 are leading banks.
After
representation from AMFI to compensate distributors, SEBI allowed transaction
charge to impose on fresh investment w.e.f.
1st November’ 2011. This has also not helped to improve the
sentiment and most of the distributors opted out from the transaction fees.
Again new initiatives are initiated after Mr. Manmohan Singh took over the
charge of finance ministry. There was a strong representation to bring back the
entry load but SEBI has flatly refused to consider the same. One needs to understand
the impact of the fee hike compared to entry load allowed previously. It is
also important to know that entry load was deducted from the investors fund
directly at the time of fresh investment whereas other expenses of mutual fund
are deducted at the back end from total investment value. It is not possible
for common investor to identify the expenses as the charges are adjusted in the
NAV declared.
Let
us understand the impact of proposed hike in expense by taking an example.
Suppose Mr. Hitesh has investment of Rs. 25 lakhs in mutual fund equity scheme
and is also continuing SIP of Rs. 20,000 every month. In the older system when
entry load was there, his net investment would have been Rs. 19,600 and Rs. 400
were deducted from him as entry load to be paid to distributor as commission.
In that case his yearly outgo would have been Rs. 4,800. Now suppose he
continues with same investment and SIP at present then hike in the fees of 25
basis point will cost him Rs. 6,250 yearly and will increase every year with
the increase in his investment value. This hike will hit worst to the investors
who are heavily invested in mutual fund schemes and also not continuing with
any further investment. At present total AUM under equity schemes across all
mutual funds is around 1.55 lakh crores and additional 25 basis point means
additional charge of 385 crores per annum.
Investors will lose these 385 crores yearly only because there is hike
in the fees and it has nothing to do with performance of the fund. The under
performing funds can still continue without any regulators intervention and
still they can increase the charge if approved.
On
one hand SEBI claims that it has protected the investor’s interest by banning
entry load and on the other hand they are increasing fees which will badly hit
investors. One should note that entire exercise is done to help and revive the
mutual fund industry and investor protection is nowhere in the mind of the
regulator. I fail to understand that the fees are too high in debt funds which
hardly give return in double digit. Therefore most of the people prefer
traditional investment like PPF, Postal schemes and Bank FDs for their part of
debt investment. These investments not only offer fixed return but are also not
subject to market risk. SEBI, AMFI and AMCs must come out with the suitable
alternative investor friendly solution. It is not advisable to keep out IFAs
from the distribution channel to benefit big players. Bailing out package will
not serve the purpose unless investor’s interest is protected.
This article first appeared at myiris.com on 30th July'2012.
