Sebi mulls performance-based fees for MFs

Might prescribe expense structure for funds based on 5-year record

After a slew of measures benefiting end-investors, it's the turn of asset management companies (AMCs) to get extra fees for making clients wealthier by good performance of their schemes.

The Securities and Exchange Board of India (Sebi) is working on a proposal to compensate fund houses on the basis of the performance of schemes over a period of time.

The sector’s executives have been debating the issue . H N Sinor, chief executive (CEO) of the Association of Mutual Funds in India (Amfi), had told Business Standard performance-based fees could be one model.

“Investment management fees might be based on the performance of the MF schemes,” said a source privy to the matter.

The market regulator might allow funds that have outperformed their respective benchmarks for five years to charge higher fees as compared to those that underperformed.

From data compiled by MF tracker firm Value Research, 200 of the total of 280 schemes had beaten their benchmarks over a five-period ending last month.

Sebi chairman U K Sinha had recently said, “Nearly 85 per cent of the funds existing in the MF industry have managed to outperform the benchmark indices.”

“Incentivising funds on good performance and penalising on underperformance has been deliberated by the industry many times. The challenge is that making performance the criteria for expense structure could prove a difficult task when implemented objectively. If this proposal becomes a norm, there could be instances of putting easy benchmarks, with an intention of beating these,” said Dihrendra Kumar, CEO, Value Research.

A CEO, who has supported this move, said, "It would be a big relief for the industry, which is operating on a very thin margin. Depending on the outperformance, we might like to have at least two to five per cent of the returns back to an AMC (asset management company)."

In 2012, the Sebi board had revamped the total expense structure, allowing fungibility and an additional 30 basis points (hundredth of a percentage point) if either 30 per cent of gross new inflows or 15 per cent of the average assets under management of a scheme came from beyond the top 15 cities.

The regulator and Amfi are also mulling if distributors and advisors should also be incentivised, based on the performance, and if there should be a trail commission- based model.

The distributor community has not been receptive to the suggestion of abolishing upfront commission and transition to a fee-based model.