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.