Cost structure in Rs 23-trillion mutual fund industry comes under Sebi lens

Junkets to distributors, narrow differential between direct and regular plan under spotlight

The cost structure in the Rs 23-trillion mutual fund (MF) industry has come under the radar of market regulator Securities and Exchange Board of India (Sebi). Sources say the regulator wants to probe the different components of the so-called total expense ratio (TER) charged to investors by fund houses.

Sebi has directed some fund houses to explain the narrow difference between the TER for their direct and regular plans. Direct plans are those where an investor bypasses the distributor by transacting directly with the fund house. According to sources, Sebi is probing whether fund houses are overcharging investors opting for direct plans by not entirely waiving the expenses related to distributors.

An analysis of the data provided by Value Research shows that in case of at least nine fund houses, the differential in the average expense ratio of direct and regular plans is less than 100 basis points.

“Fund houses are only cutting expense ratios in regular plans (which includes distributor commissions), but the expense ratios of direct plans have not come down in a similar fashion. This shows asset management companies are reluctant to take a cut in their fee income,” said Srikanth Matrubai, chief executive officer, SriKavi Wealth, a Bengaluru-based MF distributor.

Sebi also wants to find out whether the practice of sending distributors on sponsored trips to foreign and domestic locations is the reason behind these high expense ratios.

Industry players say most large fund houses hold contests every year where distributors who qualify are rewarded with junkets. Depending on the contribution they make to the business, the locations vary. For instance, one of the top fund houses is taking select distributors to Dubai next week, said sources.

 

In The spotlight
- Impact of sponsored distributor trips on total expense ratio (TER)
- Narrow discount between TER of regular and direct plans
- Distributors say fund houses not cutting expense ratios of direct plans
- A six-member sub-committee to review the structure in September

Deepak Parekh, chairman, HDFC MF, lauded the efforts of distributors in the growth of the MF industry recently, but also slammed the practice of rewarding distributors with sponsored trips. However, documents reviewed by Business Standard show there are no exceptions to this widely-followed practice. Parekh said that in many countries, this would be deemed illegal.

At the recent MF summit, Sebi Chairman Ajay Tyagi said, “We feel there is a scope to rationalise total expense ratios. We are reviewing the TER structure very closely.”

A six-member sub-committee formed by Sebi has been tasked to delve into these issues, when they meet to review the current TER structure in the first week of September. The sub-committee was formed following a recent Mutual Fund Advisory Committee meet.