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Friday, July 22, 2011

Mutual Funds panel for removing expense ratio cap

The committee on mutual funds appointed by SEBI to look into the issues faced by the industry is likely to submit its recommendations to the Board of SEBI when it meets on July 28. 

One of the issues that the committee has addressed pertains to the expense ratio of asset management companies, sources said. The committee, it is gathered, is recommending that the sub-head caps within the expense ratio be done away with. This will provide some room to mutual funds to give better commissions to their agents. 

Expense ratio is how much an investor pays a fund in percentage terms every year for management of his money. This could involve management fees, commissions to agents, fees to registrars and marketing and promotion expenses.

Currently the expense ratio has been capped at 2.5 per cent for equity funds; and there are various sub-categories of expenses which also have their own caps. It is known that the committee is planning to do away with these caps and leave the break up of expense distribution to the discretion of the mutual funds. 

It may be recalled that SEBI had, during the Chairmanship of Mr C B Bhave banned entry loads on mutual funds. A large part of this entry load used to be paid as distributors' commission. After the ban the mutual industry went through a black patch when many distributors stopped selling mutual funds. 

When Mr U K Sinha took over as Chairman at SEBI, he appointed a seven-member committee, chaired by whole time member Mr Prashant Saran to look into the problems of the mutual fund industry. 

Mr Sinha after taking over at SEBI has been often quoted as saying that while mutual fund distributors should be incentivised, the entry load ban will not be lifted. 

In fact one of the first circulars issued by SEBI after he took over related to mutual funds. SEBI in March said that load balances of mutual funds shall be segregated into two accounts – one to reflect the balance as on July 31, 2009 and the other to reflect accretions since August 2009. The first load balance can be used for marketing and selling expenses including distributor/agents' commissions, subject to not more than one third of the balance being used in any financial year. The second account could be used without any restrictions. 

Yet another recommendation of the mutual fund committee is for a one time flat fee of Rs 100 to Rs 125 to be paid by newcomer to a mutual fund.
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