You May Have to Shell out 0.55% More to Buy MF Units

Mutual funds may become a tad more expensive for investors. A committee appointed by the Securities and Exchange Board of India (Sebi) has recommended raising the total expense ratio - charged by mutual funds to manage and operate schemes - and excluding service tax from this fee.

The 14-member mutual fund advisory committee (MFAC), which met on Tuesday, has also suggested to the Sebi board to allow greater flexibility for mutual funds to use the expense ratio, which includes management fees, administrative fees, and other operating costs, said four people familiar with the matter.

The proposal to raise the expense ratio, if approved by Sebi, could result in unit holders shelling out almost 55 basis points (0.55%) more than what they are paying now. The MFAC, in the four-hour meeting, recommended raising the expense ratio to 2.5% from 2.25%. The exclusion of the service tax of 10.3% from the expense ratio will result in investors incurring costs to the tune of another 30 basis points.

"The 0.25% increase in expense ratio will not be charged on existing equity assets - but only on incremental equity investments," said a person, who attended the meeting.

MFAC, headed by former SBI chairman Janki Ballabh, debated on various issues including entry load roll-back, implementation of single cheque system and raising the net worth of AMCs. MFAC members have decided to not push for a roll- back of entry load.

Mutual funds will be able to manage expenses better if Sebi allows them flexibility to use the expense ratio. At present, mutual funds are allowed to charge up to 2.25% (in funds with assets in excess of Rs 100 crore) as expense ratio. Out of the 2.25% charged as expense ratio, fund houses are allowed to accept only 1% as asset management charges; the remaining 1.25% has to be mandatorily used to meet recurring expenses, which include payment of annual trail fees, auditor & registrar charges and dealing charges to empanelled brokers.

MFAC has asked Sebi to retain the slab system of calculating the expense ratio. Under the slab system, mutual funds with a lower asset base are allowed to charge a higher slab-rate while funds with a higher base are mandated to charge a lower expense ratio. So, a fund with asset base lower than Rs 100 crore will be able to charge 2.5% as expense ratio while funds with assets in excess of Rs 700 crore will only be allowed to charge 1.75% as expense ratio. Smaller mutual funds had protested against their larger peers' demand to remove the slab system. MFAC has voted against the proposal to increase the net worth criteria for setting up MF business. The committee has decided to retain minimum capital requirement for starting an asset management company at Rs 10 crore. The proposal to increase capital base of AMCs from Rs 10 crore to Rs 50 crore was first introduced by Sebi committee on 'Review of Eligibility Norm' in 2010 to ward off non-serious players.

The decision to maintain status quo on net-worth requirement will come as a breather to smaller fund houses. Higher capital base would have meant more capital infusion by trustee companies or promoter groups intending to start fund management business.

The committee also expressed concerns over the concentrated exposure of debt funds to NBFC papers. ET, in its February 7 edition, had reported that fund industry has more than Rs 50,000 crore worth of investments in short- and medium-term NBFC issuances.

Economic Times, New Delhi, 18-07-2012