If the capital markets regulator has its way, the cap on the expense ratios of mutual funds could be lowered from current level of 2.5% of their assets under management (AUM) to 1.5-1.75%. Moreover, the Securities and Exchange Board of India (Sebi) is also likely to ask MFs to pay for the brokerage from their own pocket instead of charging to investors. At a recent meeting, Sebi?s MF advisory committee had proposed that brokerage charges incurred while acquiring shares for an equity scheme be accounted for in the expense ratio.
In other words, this will mean for each rupee invested in a mutual fund by an investor, she will get more units. ?The regulator might come out with a regulation on brokerages within a fortnight but we are not sure about the lower expense ratio structure,? said a committee member on condition of anonymity.
While flat expense ratios were discussed at the last advisory meeting, no consensus was arrived at, he said. If the flat structure for expense ratios is brought in, profitability of fund houses would be affected.
The estimated hit to the bottom line could be around R300 crore, given that overall revenues of the mutual fund industry were around R1,300 last year. After the ban on entry load, fund houses have been facing redemptions from equity schemes.
The CEO of a leading MF said: ?The regulation on brokerage costs might not have a major impact as it will lead to less churning of portfolios and fund managers will stay invested for a longer duration. However, if a flat expense ratio is brought in, it will hurt profits of the big fund houses while small fund houses will find it difficult to survive,? he said.
Currently, while buying or selling shares, fund houses pay brokerage as well as the securities transaction tax (STT), which are taken as part of the costs. Fund houses currently shell out 0.125% as STT while buying stocks and investors pay 0.25% while redeeming their units.
At present, MF regulations permit equity funds to charge as expenses, up to 2.5% of their average daily net assets for an initial R100 crore of assets, 2.25% for the next R300 crore, 2% for the next R300 crore and 1.75% for higher amounts.
So, as the corpus increases, the expense cap comes down. As such, present regulations do not permit a R1,000-crore equity scheme to charge more than 2.05% as annual expenses.