How Sebi's recent guidelines for the mutual fund industry will impact your investments
The mutual fund landscape in India is undergoing rapid changes. The industry watchdog, Securities and Exchange Board of India, has ushered in a whole new framework for this investment avenue primarily to help revive a flagging industry. While industry players scurry to deal with the revised guidelines, fund investors need to be aware of the manner in which these steps will impact their investments.
Hike in expense ratio
Sebi has allowed the asset management companies (AMCs) to charge an additional expense ratio of up to 0.3% on the daily net asset value (NAV) of the scheme, if the net inflows are received from locations beyond the top 15 cities. Expense ratio is the amount funds cut from a scheme's NAV every year as fund management fee, distributor commission and other operating expenses. AMCs will be able to charge this extra total expense ratio (TER) if the AUM collected from these places is more than 30% of the gross inflow. In case of lesser inflows from smaller cities, the proportionate amount will be allowed as additional TER. There is, however, a provision of reclaiming the additional TER charged if the money is redeemed within one year from the date of investment. Also, until now, the service tax charge on your scheme was borne by the mutual fund company. However, Sebi has now ruled that this will be passed on to the investors.
How it impacts you
The additional TER will be charged on the entire scheme corpus, not merely on the fresh inflows. So, Sebi is essentially asking the investors from the top tier cities to directly bear the cost of getting tier II cities' investors into the mutual fund fold. A 30 basis point (bps) increase in expenses can hurt your returns over the long term, especially if your scheme is not among the top performing ones. The top performing large-cap equity funds have delivered a return of around 10% over the past three years. A 0.3% cut in returns may not worry you much in this case. However, for the schemes that consistently underperform their benchmarks, this extra levy will be an added burden. Along with the service tax, these moves are expected to add around 0.4% to the cost.
Single plan structure
The regulator has mandated that all schemes, existing and new, be offered under a single plan. All existing schemes, with multiple plans based on the amount of investment (retail, institutional, super institutional, etc), will now have to accept subscriptions only under one plan.
How it impacts you
This means that all investors in a particular scheme will be subject to the same expense structure. This will do away with differential treatment for various categories of investors, and will also lead to a sharper focus on the fund manager. It also means that certain plans may be discontinued in favour of others. Some funds have chosen to stick with the retail option, while others have opted for the institutional plan. However, in the cases where the institutional plan has been chosen, the fund houses have brought down the minimum investment amount. The discontinuation of plans will not affect the existing investments made by people in these plans and they can redeem their holdings any time. Besides, where investors have set up either a systematic transfer plan (STP) or a systematic withdrawal plan (SWP) out of these schemes, such transactions will continue to be honoured till the investor has sufficient balance under the plan.
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(Posted date - 10 Nov 2012)
Direct plan route
While Sebi has done away with multiple plans under the same scheme, it has announced that each scheme will offer an equivalent direct plan. This alternate plan is for those who want to invest in the fund directly and not go through a broker or adviser. This plan will have a separate NAV, different from the normal scheme.
How it impacts you
A separate direct plan will take out a chunk of the cost a normal fund scheme has to bear towards the payment of distributor commissions. It is likely to take up to 0.75% of the expense ratio, which means a higher NAV and better returns for investors over time. If you are comfortable enough to make investments without the need of an adviser or broker, you can shave off a significant portion of the cost by buying from the AMC directly. This alternate plan can lead to substantial savings for the investor. The 0.5-0.75% charge towards commission adds up to quite a hefty sum over time.
Source - Economic Times