The Securities and Exchange Board of India (Sebi) is planning to launch a new category of mutual funds, industry sources said. The new category will charge fees and expenses based on the performance of mutual fund schemes, sources with direct knowledge of the matter told CNBC TV18. As per the initial discussions on this, mutual fund houses are likely to be allowed one scheme each in this new category.
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As of now, there is no decision on what kind of schemes will be allowed in this category and how the expense ratios will be calculated.
Industry sources suggest that the move is an extension of Sebi’s plan of rationalizing total expense ratios across the mutual fund industry. There has been a certain push-back about the new TER mechanisms contemplated by Sebi, from some big players in the industry. Sources suggest that the idea of expenses in certain schemes being linked to their outperformance is a way to encourage better returns and consistency in performance.
Recently, Sebi, in its board meeting, said that mutual funds cannot double-charge investors in the name of TER. The regulator also pointed out that brokerages paid to distributors should be kept outside the ambit of TER. Sebi chairperson, Madhbi Puri Buch, had said that there is a distinct possibility that these brokerages are being paid by MFs for other than professional reasons.
Earlier, CNBCTV-18 had reported that Sebi has asked mutual funds to bring profit margins down in the TERs. Sources told CNBCTV-18 that the SEBI board had pointed out huge churn of investments towards schemes paying higher brokerages to distributors.
Expense ratio and fees charged by mutual funds have a direct bearing on returns earned by investors. The TER consists of operating and management fees that have a large impact on net profitability. Currently, the maximum TER that can be charged by smaller fund houses, with assets under management of up to Rs 500 crore is 2.25 percent for equity schemes and 2 percent for debt funds, according to AMFI.
