The SEBI headquarters in Mumbai. (Photographer: Santosh Verma)

SEBI Plans To Lower Mutual Fund Expenses

The market regulator wants the mutual fund industry to lower overall expenses for investors amid a debate whether India charges the highest fees in the world.

“We feel there is a scope to rationalise the total expense ratio,” said Ajay Tyagi, chairman, Securities and Exchange Board of India, at a summit organised by the Association of Mutual Funds in India. “We are reviewing the total expense ratio structure very closely.”

Morningstar in its October 2017 report said India’s average equity expense ratio at 2.22 percent is among the highest in the world. Foundation of Independent Financial Advisors in another report said at 1.88 percent, the ratio is the lowest among developing nations.

The regulator created a six-member panel under its Mutual Fund Advisory Committee to advise on rationalisation of total expense ratio, according to a SEBI official who didn’t wish to be named. The sub-committee is set to meet in September to give its recommendations.

SEBI formed total expense ratio rules when industry was still nascent, Tyagi said. “Much has changed now,” he said, adding the industry manages Rs 24 lakh crore worth of assets. “The industry needs to keep pace with these developments.”

Also read: SEBI Panel Proposes Widening Of Consent Mechanism

But AMFI Chairman A Balasubramanian said there is “little scope to rationalise the total expense ratio”. “Pricing is not the right way to analyse mutual funds,” Balasubramanian said at the same event. “It should be based on performance.”

The industry body, according to Balasubramanian, in its recent board meeting concluded that comparing India’s total expense ratio to that of the developed nations is not an ‘apple-to-apple’ comparison.

Agrees Dhruv Mehta, chairman of the Foundation of Independent Financial Advisors. “You have to keep other costs in mind such the goods and services tax.”

“In India, front-load is barred so recurring costs are higher. Developed nations such as the U.S. and Australia are fee-based, so costs are lower,” Mehta said. Distributors in India are incentivised out of the total expense ratio, he said, adding that when these costs are factored in, India is the third cheapest.

Deepak Parekh, chairman of HDFC, said, “There are concerns on commission structures that distributors are being lured with high commission.” The culture of freebies can lead to mis-selling, he said.

According to Tyagi, there’s a need to create more awareness about direct plans, which allow investors to invest directly without a distributor and are less expensive compared to investing through a distributor. “Direct plans are more cost-effective, transparent and lower instances of mis-selling.”

Mehta, however, said there is no evidence to suggest that there is mis-selling as the largest inflows are into good performing funds.

Also read: SEBI Co-Location Probe: How Much OPG Gained With First Access To NSE’s Server