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SEBI Issues Framework On Total Expenses, Performance Disclosure Of Mutual Funds

To bring transparency in expenses and reduce portfolio churning and misselling in mutual funds, the Securities and Exchange Board of India today asked asset management companies to adopt full trail model of commission in all schemes without payment of any upfront commission.

However, upfronting of trail commission will be allowed only in case of inflows through systematic investment plans, the market regulator said in a circular.

Besides, the regulator has issued a framework for transparency in total expense ratio for mutual fund schemes, limiting the additional incentives for B-30 cities based on inflows from retail investors and performance disclosure of mutual fund schemes.

The SEBI said that all scheme related expenses including commission paid to distributors will have to be paid from the scheme only within the regulatory limits and not from the books of the asset management companies, its associate, sponsor, trustee or any other entity through any route.

A trail-fee model benefits distributors if their clients stay invested in schemes for a longer period. At present, mutual funds pay distributors upfront commission as high as two percent against the one percent recommended by the Association of Mutual Funds of India.

With regard to inflows through SIPs into mutual fund schemes, a carve out has been considered only for new investors to the mutual fund industry. The upfronting of trail commissions, based on SIP inflows, will be up to one percent payable yearly in advance, for a maximum period of three years.

Implementation of this would require system integration at RTA’s end and a detailed guideline would be issued in this regard, the SEBI noted.

However, in the interim, upfronting of trail commission based on SIP inflows at mutual fund level would be available subject to certain conditions. This includes upfronting of trail commission will be for total SIP inflows of up to Rs 5,000 per month, per investor, across all schemes of a mutual fund.

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In case of misuse of the carve out for SIPs, the same would be discontinued and appropriate action would be taken against the errant participants. Further, the need of this carve out would be reviewed by the SEBI as and when required.

With regard to additional total expenses, the SEBI said that additional total expense ratio can be charged upto 30 basis points on daily net assets of the scheme based, on inflows from beyond top 30 cities subject to certain conditions. "It has been decided that the additional total expense ratio can be charged based on inflows only from retail investors from B 30 cities," the regulator said.

Till the time the term ‘retail investor’ is defined, as an interim measure, the additional total expense ratio will be based on inflows from individual investors from B-30 cities and inflows from corporates and institutions will not be considered for computing for additional additional expenses. Total expense ratio is a percentage of a scheme’s corpus that a mutual fund house charges towards expenses, including administrative and management.

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In respect of disclosure of scheme performance, the regulator asked asset management companies to disclose the performance of all schemes on the website of industry body AMFI.

All the the mutual funds scheme returns vis-a-vis the benchmark return will have to be disclosed, in terms of CAGR for various periods such as one year, three-year, five-year, 10-year and since inception.

In case of schemes falling in categories such as overnight, liquid, ultra short duration, low-duration and money market funds categorization and rationalization of mutual funds, scheme performance will have to to be disclosed for a period of seven days, 15 days, one month, three months and six months.

The new framework will be applicable with immediate effect while the disclosure of scheme performance will be within 30 days from date of issuance of the circular, the regulator said.

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