The Securities and Exchange Board of India (Sebi) released a circular on Friday that formalizes the decisions made by the board last month on energizing mutual funds (MFs) in India. From 1 October 2012, mutual funds will be able to charge 30 basis points more as the total expense ratio charged to the assets under management if they are able to garner either 30% of their net inflows, or 15% of average assets under management (whichever is higher), from the non-15 metro centres. If these funds leave the fund house before a year is over, the extra cost will be clawed back. Funds will now be allowed to pass on the service tax on its management fee to the customers.
There are two significant omissions in the circular from the earlier Sebi communication. One, the circular is silent on the fungibility of expenses within the expense ratio. Two, the circular is silent on the additional 20 basis points hike in the expense ratio to take care of exit costs. Mint had highlighted the fact that the extra 20 basis points hike would be more beneficial to the fund house than to the investors last month. However, the circular says that exit loads will need to be clawed back to the scheme, as against the earlier policy of load going into the asset management company’s kitty.
In a move that is bound to make distributors unhappy, yet at the same time nudge fund houses to catch churning (a corrupt practice by distributors to nudge their investors to buy and sell MF units frequently in order to earn higher commissions), fund houses will now need to disclose how much inflows each distributor brings into that fund house and also their assets under management with the respective fund house. Fund houses have been asked to be vigilant and monitor this data closely to keep an eye on churning.
Additionally, fund houses will now take all inflows in just one single plan, irrespective of the size of the inflows. Whether it is a large company or a high net worth individual or a small retail investor that comes with a tiny investment amount of, say Rs.5,000, all such investments will go in the same plan. However, there will be a separate, albeit cheaper, plan for direct investments. This plan will be open for those investors who bypass distributors and invest directly. These plans will be available from 1 January 2013.