Make the amortisation applicable from the start

Updated: Mar 29 2006, 05:30am hrs
A lot has been said and written about the high initial expenses being charged by equity mutual funds to investors. In fact, new guidelines are expected from Sebi anyday now. Let us examine it in detail.

Currently, Sebi allows asset management companies (AMCs) to charge a maximum of 6% of the amount mobilised as expenses in a equity MF. These are then amortised (deducted) over a five-year period from the investors account. But in a scenario where most of the newly launched schemes are witnessing a fall in corpus, the long-term investors are left paying for the amortisation charges of all other investors who have exited the scheme.

In perspective, MFs collected Rs 25,316 crore in CY05 and over Rs 19,302 crore in CY06 from investors. This sounds like an exceedingly good figure, but hides shocking facts. For starters, only nine schemes out of 42 that raised money in CY05 have seen their assets under management (AUM) rising till Feb06, while a whopping 33 schemes (78%) have lost assets. Again, the loss of assets has been exceedingly high, from 7% to as high as 80% of AUM. The reasons for this malaise are not hard to find.

To start with, the retail tendency of investing only during advanced bull phases and retiring during bear phases makes the going difficult for MFs. It is worthy to ask why no one at the regulator deems fit to ask AMCs the rationale for launching equity schemes in such quick succession. Again, it is no surprise that while different themes are being bandied about for NFOs, it is pretty much old wine in new bottle(s). At last count, there are over 20 equity funds in the pipeline to be launched over the next few months.

Another important and complex aspect of this issue is the role played by MF distributors. Since they are the vital link between the AMC and the investor, their role and efforts are vital to the survival and growth of the MF business. At the same time, the business cannot become hostage to the demands of MF distributors, especially the large ones, including banks, who dominate retail equity sales and who demand unusually high fees from AMCs. Who, in turn, deduct the same thro-ugh amortisation of issue expenses. In fact, Sebi needs to introduce stricter distribution regulations on the lines of the SEC in the US, where distributors face legal and regulatory provisions and licensing requirements before distributing MF products.

The most important and highly ignored facet of this issue is investor awareness. Both AMCs and distributors cannot survive without retail investors. The level of awareness of most retail investors is quite low and they are not in position to understand the vast intricacies of entry loads, exit loads, amortisation, recurring expenses, etc. Both Sebi and Amfi need to undertake sustained efforts to educate retail investors on their rights and privileges, while bringing about some transparency in pricing that even a lay investor can easily understand. Also, Sebi needs to set up a well-publicised grievance redressal mechanism, whereby MF investors can directly approach it with complaints and problems.

A step in the right direction would be to ban the amortisation of issue proceeds over the long term and instead make it applicable on day 1. Here, the long term investors would not be penalised or required to pay for the short-term approach of other investors. It would also make them aware of the cost of investments, since NAVs would then mandatorily start at Rs 9.40, instead of Rs 10. To conclude, further regulating MF distributors, coupled with selectively allowing NFOs and higher emphasis on investor education, will bring about some sanity in the chaos in the MF business .

The writer is national head (MF), Mata Securities