The Morningstar Global Investor Experience (GIE) study for 2019 released on Tuesday found that India is among the most expensive countries in the world in terms of costs charged in equity and hybrid mutual funds. For debt funds however, the study placed India in the middle of the pack of 26 countries analyzed by it.
The Morningstar Global Investor Experience study covered 26 major economies such as the US, UK, Australia, Germany, Japan and several developing countries such as India, Mexico and South Africa. It analyzed mutual fund expenses in an asset weighted formula rather than simple averages in order to identify what investors are paying on the ground. This particularly affects the figures for India where the majority of individual investors come through regular plans, which include distributor commissions. Globally, the study noted a regulatory push towards lower costs and increased awareness among investors about costs. It also highlighted the effect of competition, particularly from ETFs in pushing down costs.
According to the Morningstar Global Investor Experience study, the average expense ratio charged by hybrid funds in India is 1.78%. If you consider only direct plans, this falls to 1.11% and if you consider only regular plans it rises to 1.81%. Remember that regular plans include distributor commissions and direct plans do not. According to the study, these figures put India at the third worst position for median expense ratio in the world, beaten only by Germany and Canada. If you consider equity funds, the report places the median expense ratio at 1.93%. If you look at direct plans of equity only it falls to 1.07% and if you look at regular plans only it rises to 2%. This makes India the fourth most expensive place in the world in terms of costs for equity funds. Only Canada, Italy and Taiwan are more expensive. However the picture is dramatically different for debt (fixed income) funds. Here, India moves to the middle of the list. Its median expense ratio is 0.54% which falls to 0.32% for direct plans only. For regular plans it rises to 1.15%. "The expense ratios of hybrid funds look high because the bulk of the money in them is in the aggressive (equity oriented) side. Since the report is asset weighted, this affects the average figure," said Kaustubh Belapurkar, Director, Fund Research at Morningstar. He further pointed out that since direct plans have lower expense ratios, the average figures will fall as people move to direct plans.
However the report notes SEBI’s September 2018 reduction of Total Expense Ratios (TERs) as well as the ban on upfront commissions and their role in reducing expenses. “India had been amongst the most expensive geographies when it comes to expense ratios, especially for equity and allocation funds. With the recent expense cap reductions, India has seen a meaningful decrease in asset-weighted medians in this study," the report says. Belapurkar also highlighted the improvement in India’s mutual fund expenses pointing to recent SEBI regulations. “India has seen an improved grade on Fees & Expenses on back of investor-friendly regulations, like the ban on front loads and the more recent ban by SEBI on up-front commissions and overall reduction in Total Expense Ratios (TERs) capping investment charges," he said.