Securities and Exchange Board of India.
Securities and Exchange Board of India.

Investing in mutual funds becomes cheaper on Sebi measures: Report

  • India had been among the most-expensive countries when it comes to expense ratios
  • The steps taken by Sebi have helped in improving India's fees and expenses grade to 'average' from 'below average'

Investing in mutual funds has become less expensive in India due to several investor-friendly measures taken by the markets regulator Sebi, including ban on upfront commissions as well as front loads and a cap on expenses charged from investors, according to a report by Morningstar India.

India had been among the most-expensive countries when it comes to expense ratios.

The steps taken by Sebi have helped in improving India's fees and expenses grade to 'average' from 'below average'.

India has earned a higher grade than several American, European and Asian markets such as Belgium, Canada, France, Germany, Hong Kong, Spain, Singapore, Italy, Mexico and Taiwan.

Average grade is driven by the combination of a globally competitive and relatively lower asset-weighted median for fixed-income funds, which reflects traction in commission-free share classes and relatively higher asset-weighted medians in allocation funds and equity schemes.

According to Morningstar's Global Fund Investor Experience (GFIE) 2019, "India's fees and expenses grade improves to average in this study, from below average in the 2017 study." "India had been among the most-expensive geographies when it comes to expense ratios but 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 ratio (TER) capping investment charges, contribute to India's improved grade," it added.

With the recent expense cap reductions, India has seen a meaningful decrease in asset-weighted median TER, the fee that mutual funds collect from investors every year to manage their money, the report noted.

TER is a percentage of a scheme's corpus that a mutual fund house charges towards expenses, including administrative and management.

Besides, India is one of the four countries (Australia, the Netherlands and the UK being the others) where initial charges or front loads are banned, it added.

The report said India's higher asset-weighted median TERs in equity funds and allocation funds are primarily driven by the fact that majority investors prefer the services of mutual fund distributors and thus invest through a commission-embedded plan.

As such, the country largely follows the bundled expense ratio structure with commissions embedded into the expense ratios of funds. Investors do not incur any additional costs such as advisory fees, platform fees, or front-end loads when purchasing distributor share classes.

However, unbundled share classes (direct plans) assets are rising gradually as investors benefit from the lower expense ratio compared with distributor share classes.

In 2018, Sebi mandated that distributor fees will be paid from scheme account and not from the books of mutual fund houses.

Earlier, asset management companies used to pay distributors upfront commission as high as 2 per cent against the 1 per cent recommended by industry body Association of Mutual Funds in India. Upfronting of trail commission has been allowed only in case of inflows through systematic investment plans.

Besides, the regulator made an overhaul of the fee structure of mutual funds and put a cap on the TER

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