Sebi should be complimented for trying to give investors a fair deal

The Securities and Exchange Board of India (Sebi) has been quite vocal about its concerns over the total expense ratio (TER) of mutual funds. On Monday, the markets regulator walked the talk by reducing the TER, which is a percentage of a scheme's corpus that a mutual fund house charges towards expenses including administrative and management. The regulator should be complimented for trying to give a fair deal to investors. The concept of the TER started in the late 1990s, when assets under management (AUM) of the industry were Rs 500 billion. These have gone up to Rs 25 trillion now, making a case for lower costs. A mutual fund has a certain fixed cost and after a certain fund size, the extra cost of managing extra money is marginal. The industry, however, continued with the earlier levels of the TER, lending itself open to charges of unfair pricing.

That explains why Sebi has gone along with recommendations of the Mutual Fund Advisory Committee for capping the TER for equity-oriented mutual fund schemes (closed-ended and interval schemes) at 1.25 per cent and for other schemes at one per cent. The cap for fund of funds will be 2.25 per cent for equity-oriented schemes and two per cent for other schemes. Even better is the decision to allow the highest TER (2-2.25 per cent) for the lowest AUM slab (0 to Rs 5 billion). The TER will go down as the AUM slab increases. For instance, for the highest AUM slab (over Rs 500 billion), the TER ranges between 0.8 and 1.05 per cent, depending on whether it is an equity-oriented scheme or not. The move was long overdue anyway as a recent study showed that despite the cap on upfront commission, domestic equity schemes fell in the most expensive of global brackets in terms of fees and expenses for equity and allocation funds.

In another move aimed at enhanced transparency, Sebi has mandated that commissions, expenses, etc shall be paid from the scheme only and not by any other route. Further, the mutual fund industry has to adopt the full trail model of commission in all schemes without paying any upfront commission, barring a small carve-out for certain systematic investment plans (SIP). Yet another decision targets better performance disclosure norms, as Sebi now requires “adequate” disclosure of all schemes’ returns (category wise) vis-à-vis its benchmark (total returns) to be made available on the Association of Mutual Funds of India’s website.

The only decision that is jarring is the framework for enhanced borrowing by large corporates (entities with outstanding borrowings above Rs 1 billion with tenures of more than a year), which will come into effect from April 1, 2019. According to this, such corporates shall raise 25 per cent of their incremental borrowings for the year through the bond market. It’s true that the corporate bond market is valued at around $290 billion, around 17 per cent of India’s gross domestic product, way lower than the equity market at 80 per cent. But such a diktat is mis-directed and difficult to implement in the absence of any real reforms. In any case, this is not the way to develop a bond market.

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