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The executive is not alone. In fact, many fund houses, especially those that handle significant institutional money, dabble in what industry players call ‘NAV management’, adjusting expenses against returns made on a particular day. The aim is twofold: Maximise returns and shore up assets in the process.
The Securities and Exchange Board of India’s (Sebi’s) recent diktat asking fund houses to disclose the total expense ratio (TER) of their schemes daily, however, may put an end to this practice. Investors need to be informed via email or SMS at least three working days before any changes are effected.
“So far, expenses were being charged at the whims of the fund houses,” said the chief executive of a fund house. “Investors can now get the actual returns rather than the accountants’ returns artificially added to the NAV.”
Distributor Vinod Jain said: “Funds will become more thoughtful in deciding on what they can charge.”
The TER is an annual charge deducted from the NAV daily. TER includes fund management charges, marketing and distribution costs, and registrar and transfer (R&T) expenses, among others.
The impact will be felt more on the debt side where competition to attract large institutional money is fierce. “The norms will affect liquid funds more than anything else. Direct plans, where the charges are opaque, will also see expenses stabilise,” said Jain.
As on January 31, liquid assets stood at Rs 3.8 trillion, about 17 per cent of the total mutual fund (MF) assets of Rs 22.4 trillion. Direct plans, which allow investors to bypass distributors and save commissions, now form about 40 per cent of the overall MF asset.
This is how the expense play usually works. Suppose 8-10 basis points (bps) is the cost of running a liquid fund. The fund house may reduce this to anywhere between zero bps and 3 bps on days when the scheme performance is dismal. This is done to prop up returns. On days when the performance is good, the expense is raised to recover the cost. The ‘low expense’ carrot is also dangled to attract large corporate houses.
Expenses for other debt categories swing wildly as well. For instance, short-term funds may charge anywhere between 30 bps and 100 bps, depending on the returns matrix. Income funds typically charge 75-150 bps but on days when returns are poor, fees can go as low as 40-50 bps.
“Over the last few months, fund houses have reduced expense ratios for debt schemes affected by the spike in yields. Sebi’s new diktat will prevent this tinkering,” said Kaustubh Belapurkar, director (fund research), Morningstar India.
Yields on the 10-year benchmark government bond have risen more than 100 bps from the end of July last year.
TERs are charged according to a slab-based formula. For debt schemes, the maximum TER that a scheme can charge is 2.25 per cent for the first Rs 1 billion, 2 per cent for the next Rs 3 billion, and so on. This excludes the additional 30 bps expense for assets accrued from B15 cities and 20 bps for ploughing back exit loads. MFs are free to charge any fee within this limit.