Fund houses want freedom to spend

Sebi willing to listen, but wants lower expense ratio.

The Securities and Exchange Board of India (Sebi) and mutual fund houses are engaged in an intense discussion that could lower costs for retail investors further, by as much as 20 per cent.

Fund houses have asked the market regulator to give them freedom on the way they should use the expense ratio while maintainng the existing cap. The reason: They feel this freedom will help them to allocate funds, as per their requirement.

The market regulator is willing to give them this allowance, but only if they bring down the cost by 25-50 basis points, to 1.75 per cent. On an average, an equity scheme charges 2-2.25 per cent to investors as the expense ratio.

Sources close to the development said, “Sebi is quite fine with the freedom if fund houses can reduce their cost structures further. However, fund houses are still debating within themselves, if this can be acceptable.”

The proposal, which is among the few others with the market regulator from the mutual fund committee, is under discussion. A Sebi-appointed committee has already given its recommendations, which are going to be discussed in the next Sebi board meeting.

At present, for equity schemes, the guidelines allow fund houses to charge 2.50 per cent for a corpus of up to Rs 100 crore, 2.25 per cent for the next Rs 300 crore, 2 per cent for the next Rs 300 crore and 1.75 per cent for more. For debt schemes, the expenses can be 25 basis points less.

Out of this expense fee, there is a cap of 1.25 per cent on fund management fees for equity schemes and 1 per cent on debt schemes. The rest of the money is used for registration and transfer costs, custodian fee, investor communication and marketing.

Fund houses believe that if they get the freedom to use the money, it can be deployed more aggressively to market their schemes or be paid to distributors. “At present, it is difficult to push products because of distributor disinterest. We need to incentivise them more,” said a fund manager.

The mutual fund committee, which was set up by Sebi in May to recommend ways to help the industry grow, has made several proposals.

Sources in the know said there were proposals to incentivise distributors by paying them a higher trail commission of 20-25 basis points, depending on the tenure for which the investor stayed in a scheme. This would also discourage distributors from moving investors from one scheme to another in a hurry. Another suggestion was to charge a one-time fee of Rs 100 for entering a scheme and Rs 150 for a new investor.

Though bringing back entry load directly was ruled out by Sebi Chairman U K Sinha in a recent CII Mutual Fund Summit, he had clearly indicated there would be some form of incentive for the distributor.

“With the number of folios declining and small town sales reducing, there is a need to incentivise the distributor. Unless it is given to distributors, it is difficult to increase the penetration of the market. Sebi is looking at ways to incentivise distributors,” Sinha said, adding the regulator would also focus on the “accountability” of distributors as well.