The Securities and Exchange Board of India (Sebi) could be considering action against some big mutual fund houses charging very high expense ratios from their customers, a media report said.
Moneycontrol reported that Sebi might introduce stricter rules for expenses charged by the mutual funds from customers following an internal study in December last year.
The report said that the capital market regulator might put a threshold on the expense ratio charged from customers by the mutual fund houses based on their overall equity under management (AUM).
The expense ratio, it said, could be either 1.25 per cent or 1.50 per cent, if the AUM climbs to Rs 50,000 crore.
Sebi may have drawn this inference after observing that some mutual funds distributors transfer their investors’ money from the existing to new schemes when a new plan is launched, as it enables them to earn a higher commission, the report said.
As per the existing Sebi rules, mutual funds can charge a total expense ratio (TER) of up to 2.25 per cent, if the AUM reaches Rs 500 crore. However, the regulator now wants them to reduce it from the prevailing rates.
In a revision in 2018, Sebi ruled that TER should reduce as the scheme grows in size. However, it did not happen. It was found that mutual funds, including large fund houses, continue to charge higher TERs for new schemes, even though some fund houses may have schemes over Rs 20,000 crore.
Some distributors, the report said, are “incentivised” to shift investors from a larger to a newly-launched scheme of the same fund house. But while the investor pays more for the shift, the money remains within the fund house. It is done so that distributors can make a quick buck. Although such changes are found in regular plans, Sebi believes it must stop.
Sebi is also considering removing exemptions. The report said it might either remove the small-town penetration incentive of 30 basis points (bps) or bring it within the TER that mutual funds charge.
Currently, the schemes can charge an extra 30 bps besides the TER if they get a “certain percentage of its corpus from beyond the largest 30 towns”.
They also pay goods and services tax (GST) on the investment management fee, usually up to 60-70 bps, collected from customers. Sebi now wants to bring GST within the TER.
The latest Sebi move is reportedly aimed at reducing the fund houses’ ability to pay distributors.
