Sebi wants MF schemes to give true picture of returns

Regulator seeks schemes to be benchmarked to total return index in place of price-return index

The Securities and Exchange Board of India (Sebi) wants the mutual fund (MF) industry to benchmark the returns of its equity schemes against a total return index, a move that would diminish the alpha generated by such schemes and help investors assess the returns better.

“The regulator believes that the new benchmarking methodology would bring in greater transparency and wants the industry to move in that direction,” said a senior MF official, with direct knowledge of the discussions between the markets regulator and MF chiefs that took place last week.

At present, the net asset value (NAV) of MF schemes takes into account dividends for computing returns. The schemes are, however, benchmarked against price-return indices that do not take into consideration the dividend component. 

On an average, the dividend yield for Indian equities works out to 1.25-2 per cent for a year. In other words, dividend yields can add anywhere between 1.25 per cent and two per cent to the returns of equity MF schemes. 

Total return benchmark indices assume that any cash distribution, such as dividend, is reinvested into the index. Comparing MF scheme returns with these indices, therefore, makes it a more equitable comparison. Globally, except for derivative products, 90 per cent of MF schemes are benchmarked to total return indices, according to experts. 

Illustration: Ajay Mohanty

“The sector should gradually move to total return indices for comparing scheme performance as it will give a more accurate picture of the fund managers’ capability and bring in more transparency,” said Manoj Nagpal, chief executive officer, Outlook Asia Capital. “The returns will remain the same, but the alpha will reduce to the extent of the dividend.”

DSP BlackRock Asset Management Company had recently announced that it would disclose the performance of its active equity mutual funds with the total return index as the benchmark.

“Our move to disclose returns against TRI (total return index) will help in giving the right picture of the real alpha generated by active fund management. The alpha that is shown currently may look overstated as dividends are not added in benchmark returns. We want our investors to have a true picture of the alpha generated and have the right expectations from their investments,” said Kalpen Parekh, president, DSP BlackRock Investment Managers.

The impact will be more pronounced on large-caps than mid-cap schemes. As of Monday, large-cap schemes outperformed their respective benchmarks by 2.08 per cent and 1.78 per cent over a three-year and five-year period, respectively, data collated from Value Research show. After subtracting the 1.5 per cent dividend yield, the outperformance is reduced to 0.58 per cent for a three-year period and 0.28 for a five-year period. 

Mid-cap schemes outperformed their respective benchmarks by 2.96 per cent and 5.13 per cent over a three-year and five-year period, respectively. Their outperformance, after subtracting the 1.5 per cent dividend yield, is reduced to 1.46 per cent for a three-year period and 3.63 per cent for a five-year period.

Rejig in incentives on the cards for 15 cities

One of the issues that came up for discussion between the Securities and Exchange Board of India (Sebi) and mutual fund (MF) industry executives last week was the incentives reserved for beyond the top 15 cities (B15). Sebi has also asked MFs to look at developing ETF (exchange-traded fund) products seriously and promote it among retail investors. A MF official suggested incentives for B15 be dropped. Instead, incentives could be given only for bringing in first-time MF investors, whether from B15 or top 15 (T15) cities. The regulator is in favour of making a change to this effect, said a person familiar with the matter.

In 2012, the markets regulator allowed fund houses to charge an additional 30 basis points (bps) in the total expense ratio if new inflows from B15 were at least 30 per cent of gross new inflows in the scheme or 15 per cent of the average assets under management, whichever was higher. The carrot seems to have worked, as one of every four rupees invested by individual investors in MF schemes now comes from B15 cities. At the end of June, 26.2 per cent or Rs 2.5 lakh crore of individual assets came from B15 regions. A year before, it was Rs 1.6 lakh crore and made up 23.8 per cent of total individual assets. Currently, equity ETFs comprise nine per cent of total equity assets. Despite low costs, ETFs have not taken off in India owing to lack of liquidity and the outperformance of active funds. Globally, ETFs have stolen a march over active equity funds. Back home, ETFs have got a leg-up from increased equity allocation from the Employees’ Provident Fund Organisation. In May, the retirement body gave its nod to hike the investment limit in ETFs to 15 per cent from 10 per cent earlier. This is expected to bring in an additional Rs 18,000-20,000 crore into equities in FY18.