By Nishant Kumar/Reuters
Mumbai: Intense competition and demanding investors have forced India’s asset managers to lower the fees they charge on cash funds though such funds have given ever improving returns in the last two years, experts said.
Since March 2005, the number of cash funds has gone up from 59 to 104 and the emergence of fixed maturity plans has posed a direct threat to these schemes, they said.
By end March, the average annual fees of cash funds had dropped to 0.46% from 0.64% two years ago, indicating better returns for investors but lower proportional income for fund managers, data from Icra Online Ltd showed.
“It is (purely) a competition play that has forced fund houses to lower expenses,” Sandeep Singh, national sales head of Franklin Templeton Asset Management (India), said.
About a fifth of the funds now charge 23 basis points or lower. The minimum that any fund charged two years back had been 28 basis points, data showed.
Cash funds enable investors, especially corporate houses, to park temporary surpluses safely and profitably. For fund houses, these schemes bring in large assets while also giving an opportunity to cross-sell other products to wealthy clients.
Fixed maturity plans, that invest in debt instruments aligned to their maturities, have only added to the pressure on lower costs.
“They have forced fund houses to look at fine pricing,” Singh said adding fixed-maturity plans offered better returns at lower cost, though with a lock-in period.
Indian regulation allows a fund to charge up to 2.5 percent depending on the size of its assets. But cash funds charge much less as lower fees could often prove to be the only selling point, Mugunthan Siva, chief investment officer of OptiMix, said.
Fund houses try to “compete on the cost side if they can’t necessarily show much differentiation on the return side,” he said adding, no one could ignore cash funds that brought in such large amounts.
Comfort from scale
Siva and Singh agreed investors had turned cost conscious, especially in debt funds. With assets swelling, more and more fund houses found they could afford lower percentage fees.
“Scale is definitely there which is helping fund houses,” Singh said.
Cash funds, which typically invest in money market instruments, managed nearly 23% of total mutual fund assets of Rs3.5 lakh crore ($86 billion) as at April end.
Such funds gave an average return of 7.01%in year to 29 May as against 4.38% in the corresponding period two years back, data from global fund tracker Lipper showed.