According to the Sebi chairman Ajay Tyagi, there is a need to rationalise the expense ratio and the regulator is looking into it
In the midst of an ongoing debate on whether Indian mutual funds charge higher expense ratio, market regulator Securities and Exchange Board of India (Sebi) on Thursday said there is a scope for rationalistaion of the total expense ratio (TER) of funds.
According to the Sebi chairman Ajay Tyagi, there is a need to rationalise the expense ratio and the regulator is looking into it.
"We are reviewing the TER structure very closely," he said on the sidelines of a mutual fund summit organised by Association of Mutual Funds of India (Amfi). He said the concept of TER was introduced in late 1990s when the industry's asset under management was Rs 50,000 crore. The industry now manages Rs 23 lakh crore worth of assets.
"So, some of the elements need rationalisation now, and we will come up with some of the prescriptions on that,' Tyagi said.
Recently, mutual fund tracker Morningstar study titled Global Fund Investor Experience Report 2017, conducted in 25 countries across four broad parameters such as regulation and taxation, disclosure, fees and expenses and sales, rated India with an overall grade of average, but below average grade in fees and expense.
"India has retained an overall grade of Average and now leads most markets in terms of Disclosure practices. The Below Average grade in Fees and Expenses is a function of the higher expense ratios in India, which, in turn, reflect the more limited economies of scale at present," the report said.
The report said India's fees and expenses grade of below average reflects some of the highest expense ratios for equity and allocation of funds in the study and the reliance of ongoing trailing commissions to pay for advice. The average equity expense ratio at 2.22%, is one of the highest globally.
"AMCs need to re-strategise their cost structure," said Deepak Parekh, chairman, HDFC.
However, the report also said that Indian investors do not pay front loads when acquiring funds, and the expense ratios for fixed-income funds are globally competitive. India also prohibits funds from charging performance fees, which removes issues around the structuring and disclosure of such fees.
Parekh also said that there are concerns over incentivising distributors who are lured with high commission. The practice of freebies and rewarding distributions can lead to mis-selling, he said.
Tyagi said that Amfi should promote direct plans to check mis-selling in mutual funds. According to him, more investment through direct plans has advantages such as lower transaction cost, more transparency and lower instances of mis-selling.
Rajesh Iyer, chief executive officer, DHFL Pramerica, said the distribution cost is higher currently but will gradually moderate as consolidation will happen over time. In the distribution business, getting the right people is not easy and one has invest in the business to get right kind of people, he said.
AFFORDABLE INVESTMENT
- 2.22% - average equity expense ratio in India, one of the highest globally
- Rs 23 lakh crore - Assets under management by Indian MF industry
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 "Ajay Tyagi")
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