PremiumOn 9 April, Sebi registered investment advisor Basavaraj Tonagatti started receiving emails from his clients. The message contained notifications from HDFC Mutual Fund and UTI Mutual Fund informing investors that the fund houses were raising the total expense ratio (TER) on their index funds.
According to the notification from UTI Mutual Fund, the company plans to hike the TER on its UTI Nifty Index Fund from 16 April. For direct plans, the increase will be 8 basis points. It plans to raise it to 0.18% from the existing 0.1%. One basis point is one-hundredth of a percentage point
For the regular plan, the proposed increase is 14 bps. The new TER will be 0.28% from the existing 0.14%.
HDFC Mutual fund has proposed to increase TER on two index funds from 15 April. The TER for HDFC Index Fund-NIFTY 50 will double – from 0.1% to 0.2%, for the direct plan. For the regular plan, it will be 0.40% from the existing 0.30%.
The fund house has proposed same changes for HDFC Index Fund-Sensex Plan.
Change in TER is not uncommon. Mutual fund houses can hike or lower it as long as they are within the limit which the regulator has prescribed. But investors tend to be more sensitive to TER in an index fund than in actively managed funds.
“Investors choose index fund as they are low-cost, and returns are similar to the benchmark. Those who invest in active funds do so to beat the benchmark returns, and they don’t mind paying higher charges," said Chandan Singh Padiyar, a Sebi-registered investment advisor.
Investment advisors are unhappy as these index funds are among those which they recommended to their clients. “These funds are among the better-managed index schemes with low tracking error and higher corpus. Any increase in TER impacts the returns of investors in the long term," said Tonagatti.
UTI Nifty Index fund has a corpus of ₹3,592 crore, according to data from Value Research. HDFC Index Fund-NIFTY 50’s net assets are at ₹2,750 crore. The assets under management (AUM) of HDFC Index Fund-Sensex Plan are ₹2,063 crore.
“Besides TER and tracking error, we also look at the corpus of a fund before recommending. Higher AUM gives comfort that the fund will be able to handle the redemption pressure better," said Padiyar.
An email sent to HDFC Mutual Fund and UTI Mutual Fund remained unanswered.
“At 10 bps TER, margins for even an index scheme is low. Fund houses keep 2 bps from each scheme for investor awareness programs. Then, there are other costs such as dedicated fund manager and team to run the scheme," said an official of a mutual fund house on condition of anonymity as he was commenting on the competitor.
According to investment advisors, despite the TER hike, the three schemes would continue to be among their recommended funds as they are better managed. "These are changes that advisors and investors have to live with," said Padiyar.
