In a move that might see investors pay lower charges, the Securities and Exchange Board of India (Sebi) is looking to bring down the total expense ratio (TER) of mutual funds. Fund houses currently charge anywhere between 1.5% and 2.5% for equity schemes and 1-2.25% for debt schemes.
The market regulator has also asked the mutual fund industry to promote direct plans — plans that investors buy without a distributor being involved — as these have not yet picked up in a big way.
Sebi chairman Ajay Tyagi on Thursday said large asset management companies (AMCs) have a fairly high market share of the total assets under management (AUM), revenues and profits for the industry as a whole, indicating a high concentration of the industry in a few hands.
Speaking at the Association of Mutual Funds in India’s (Amfi) second edition of the annual Mutual Fund Summit in Mumbai, he said: “Are such disproportionately high profits due to high TERs, especially in equity funds? You would appreciate that from an overall industry perspective, some thinking is definitely required to bring in elements that facilitate a healthy competition in the industry.” He also added that, they are are reviewing TER structure carefully.
TER is a percentage of a scheme’s corpus that a mutual fund house charges towards expenses including administrative and management among other expenses. Mutual fund houses charges anywhere around 1.5-2.5% for the equity funds and 1-2.25% for the debt funds.
“It is a major cause of concern that despite such tremendous growth, majority of market share of the industry remains concentrated with a few big players. The top four mutual funds account for almost 50% of the industry AUM and the top seven mutual funds account for around 70% of the industry AUM. Concentration in the industry is evident not only in the AUM figures but also in the revenue and profit margins of the MFs,” Tyagi said.
According to the data from Amfi, the total AUM of the industry for the April-June quarter stood at `23.4 lakh crore, out of which nearly `19 lakh crore is held by the top 10 players in the mutual fund industry.
Sebi also asked the mutual fund industry to be more vigilant about the kind of risk they are taking and how these risks are being valued so as to ensure that the portfolio is adequately reflecting the maturity transposition and liquidity risk properly in debt funds.
HDFC chairman Deepak Parekh, the guest of honour at the event, while sharing his vision for the mutual fund industry, emphasised on important trends including doubling of AAUMs to `50 lakh crore in the next five years, inculcating ethical and investor-focused approach towards distribution, digital disruption and protection of customer data, orienting investor approach towards long term investing, and also nurturing talent for heralding bright future for the Indian mutual fund industry.
The market regulator also said mutual funds are entrusted with the task of being the caretaker of investors’ funds and they perform an important public utility function.
“Some recent cases, the details of which I need not get into, do not augur well with the public service character of the industry and have to be avoided at all costs. An arm’s length relationship with respect to related party investments as also avoiding conflict of interest is the need of the hour,” Tyagi added.