The Global Investor Experience Study (GIE) of Morningstar has drawn criticism from the Foundation of Independent Financial Advisors (Fifa) -- a body of mutual fund (MF) advisors -- with the latter differing from the study’s finding that India is the fourth most expensive markets for investing in equity funds.
Last week, Morningstar's study said that India’s overall ranking on fees and expense had improved on the back of the regulatory changes (moving India from below average to average group of markets), but pointed out relatively higher expenses when investing in equity funds.
According to Dhruv Mehta, chairman of Fifa, the study doesn’t do a fair comparison. “Morningstar’s study when ranking fund fees does not distinguish bundled markets (where advice costs are embedded in total expense ratios like India) with unbundled markets, where advice costs have to be paid separately through fees. This can lead to erroneous conclusion about relative rankings. On an overall cost to investors, India is likely to be among the least expensive markets.”
A Morningstar spokesperson said, “For India, taken separately, the medians considering only distributor plans come in higher than the overall medians, while the medians for direct plans are more competitive globally. Assets in direct share classes have been rising gradually among investors who have partnered with fee-based advisors.”
Advisors say that such a study should also take into account cost of advice and the value an advice has to offer in a market like India.
“Unlike developed markets like US, active fund management has still delivered periods of sharp outperformance. So, cost relative to returns delivered by the funds is also likely to be much cheaper compared to other markets,” Mehta added.
Further, he pointed out that comparing an active-oriented market like India with a passive-fund market like US is not a fair comparison. Passive funds tend to be cheaper than actively-managed funds.
Highlighting the important role of advisors and the nuances of Indian markets, the Morningstar spokesperson said, “India is still an under-penetrated market for MFs. Advisors/distributors have done a phenomenal job in educating, nurturing and ensuring investors stick to their long-term plans.”
He added that as a result of this, “… majority of individual investors seek the services of mutual fund distributors and thus invest through a commission embedded plan, resulting in India’s relatively higher asset-weighted medians.”
Morningstar re-iterated that it respected the work done by the independent financial advisors in India and state that globally good advice is valuable and thus financial advisors who deliver it ought to be paid.
“Where we differ is on how they ought to be paid, making differences in market practices worth highlighting,” the spokesperson said.
In September last year, the Securities and Exchange Board of India capped the maximum limit on TERs to 2.25 per cent, from 2.5 per cent earlier, which was applicable on equity funds. The regulator also scrapped upfronting of commissions.