MF industry lauds Sebi move to bring fungibility in expense ratio

Written by fe Bureau | Mumbai | Updated: Aug 17 2012, 07:13am hrs
Move to set up advisory committee and charging of service tax to investors bring cheer

The slew of initiatives announced by the Securities and Exchange Board of India (Sebi), such as bringing in fungibility in the overall expense ratio and the decision to set up an advisory committee to revive the fortunes of the mutual fund industry, are being seen as key positive measures.

This is a good beginning, said Sanjay Sachdeva, president and CEO, Tata MF, adding that the initiative will have a long-term impact. According to Sundeep Sikka, CEO, Reliance MF, the initiatives would help bring household savings into the capital market. Making the expense ratio fungible will enable fund houses to pocket higher AMC fees, which, until now, was capped at 1% for equity schemes. The fungibility will also enable fund houses to pay a higher amount to distributors.

However, industry participants believe, Sebis move to credit back the exit load to the scheme (of which 0.20% will be added to the expense ratio) will restrict the fund houses ability to pay upfront commissions to distributors. Till now, much of the exit load was used by fund houses to pay upfront commissions to distributors and for marketing expenses. The move will limit the ability of fund houses to pay upfront commission, said Deepak Chatterjee, CEO, SBI MF. Currently, distributors could get paid up to 1.5% as upfront commission for equity schemes.

The move will benefit investors, though. The exit load will now be directly credited back to the mutual fund account and push up the NAVs of the schemes. The benefit accrued from the exit load will more than compensate for the service tax that the investor will have to shell out, said Dhruv Chatterji, research analyst, Morningstar India.

Industry participants believe that the move to allow service tax on MF schemes to be charged to investors aligns it with the widely accepted practice in other financial products and sectors.

Market experts hailed the move to incentivise fund houses for expanding beyond the top 15 cities. It is a good beginning and will help ensure that the countrys household savings are channelised into mutual funds, said Sanjay Sachdeva, president & CEO, Tata MF. According to a recent PwC report Is there a silver lining, there was a need to increase the penetration of mutual funds as the top five cities contributed over 71% of the total AUM, with Mumbai alone accounting for more than 42%.

The proposal to bring mutual funds under the ambit of the Rajiv Gandhi Equity Scheme could turn out to be a gamechanger if implemented, especially if the tax benefits are over and above the R1 lakh limit under Section 80C, said Debashish Mallick, MD & CEO, IDBI Asset Management.

The requirement for more disclosure on the part of the AMCs will bring greater transparency and benefit investors, said Chatterji. The initiatives to set up an SRO, specifically for distribution of mutual fund products, and to set up a committee on mutual fund policy were also regarded as steps in the right direction by industry participants. The AUM of the mutual fund industry stood at R7.30 lakh crore as on July 31, 2012, according to data from the website of industry body Amfi. The industry has been struggling ever since entry loads were done away with in August 2009.