The Securities & Exchange Board of India (Sebi) is considering steps to curb differential treatment among varied classes of mutual fund investors, but institutional investors appear to be the preferred lot at present, at least when it comes to charging fees, according to an FE study.
Mutual funds currently charge lower fees in their institutional plans floated under a parent scheme than that of retail plans. Interestingly, when it comes to exit loads though, in many cases, MFs have been found to be charging them higher if they make a quick exit.
At present, all the institutional plans in debt schemes have lower expense ratios compared to retail investors. According to Value Research data, the average expense ratio charged to the institutional investors in floating rate long-term schemes is 0.47% per annum while it is 0.61% per annum for the retail investors. In case of medium-term debt schemes, retail investors have to pay over 1.4% while institutional clients pay 0.99% on an average. Expense ratio is the annual expenses of an MF scheme, which includes the management fee and distribution cost, amongst others, and is expressed as an annual percentage of average assets under management (AAUM).
?Servicing cost is higher for retail investors on a relative basis, as the invested amount is small,? said Achal Kumar Gupta, MD of SBI MF. Secondly, unlike institutional investors who invest directly into funds, retail investors have to go through distributors and have to be given commissions?upfront as well as trailing. Currently, the AAUM for the MF industry stands at over Rs 6.75 lakh crore, out of which over Rs 4 lakh crore go into debt schemes.
Apart from expense charges, MFs also differentiate in exit loads. According to the data, Axis short-term scheme retail option charge 0% exit load while for institutional investors they charge 0.25% for redemption within 90 days. Many fund houses were found to have differential exit load structure, often to the detriment of institutional investors.