A mutual fund advisory committee of the Securities and Exchange Board of India (Sebi) on Tuesday recommended the exit load — the fee charged on investors for selling their units before one year — be ploughed back into the scheme.
At present, the exit load goes to the profit and loss account of the fund house. As a result, the balance sheet gets a fillip when more people leave the scheme. On the other hand, the existing investors suffer because of the loss in corpus. By ploughing back the exit load into the scheme, the net asset value improves, benefitting unit holders.
The Sebi committee also considered measures such as 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 and the fungibility of its use to rejuvenate the struggling mutual fund industry.
To incentivise the fund houses, the committee actively discussed the proposal to raise the expense ratio by 25 basis points to 2.5 per cent, two persons familiar with the matter said. The committee also considered a move to allow fungibility of the expense ratio, which will help fund houses pay higher commission to distributors. No decision has been taken yet, the sources said.
The mutual fund industry is going through tough times as it has lost 1.5 million equity folios in the first six months of 2012, according to Sebi data. Prime Minister Manmohan Singh, who last month took charge of the finance ministry, had outlined resolution of problems in the industry as one of the priority areas.
In a meeting with top mutual fund executives and the industry body, Association of Mutual Funds in India, last week, the finance ministry had showed its willingness to consider several steps including increasing the expense ratio.
However, smaller fund houses are not happy with the idea of raising the expense ratio, and say the proposal for a blanket increase is being pushed by the larger players.
Raising the expense ratio by 0.25 per cent is likely to put a Rs 450-crore annual burden on investors of equity schemes. The top-dozen fund houses are likely to benefit the most as they would corner 88 per cent of the proposed rise.
According to data provided by mutual fund tracker Value Research, these fund houses control Rs 1.63 lakh crore, or 90 per cent, of equity assets in the industry. As of June 30, equity assets of the 44 mutual funds in the sector were Rs 1.8 lakh crore.
If an increase in expense ratio is approved, the 32 weaker players, with equity assets of Rs 3,000 crore or less-all struggling to make ends meet and sitting on losses-will see their annual earnings increase by a combined Rs 50 crore. The bottom 10 players will earn just Rs 1.17 crore between them.