Market regulator SEBI (Securities and Exchange Board of India) has introduced many reforms in mutual fund regulations that are expected to attract investments. The new reforms are likely to widen the geographical reach of the industry and benefit investors in rural and semi-rural cities.
On Thursday, SEBI at its board meeting has allowed asset management companies (AMCs) flexibility on fees. The regulator has allowed AMCs to charge up to 30 basis points (bps) more as total expense ratio (TER) if they are able to get inflows from smaller towns beyond the top 15 cities and if these inflows are 30% of the total inflows. (100 basis points refer to 1%).
Expense ratio refers to the amount charged by mutual funds to manage and operate schemes. It includes management fees, administrative fees and other operating costs.
To promote long-term investment, AMCs may be able to charge up to 20 bps as additional TER if the inflows from cities beyond top 15 are not redeemed within one year. The increase in TER may surely increase the cost for investors in the schemes.
If the investments done by an AMC are less, then a proportionately lower amount will be allowed as additional TER. To promote direct investment, SEBI has decided to have a separate plan for direct investments, with a lower expense ratio.
SEBI has also made it mandatory for AMCs to make complete disclosures regarding efforts taken by them to attract investments. They would be required to report details of opening of new branches beyond top 15 cities and other efforts undertaken. The regulator has also allowed AMCs to pass on service tax payable on investment management fees to investors. It would now be charged to the scheme.
The charge of service tax—to be paid by investors—would work as an additional burden for investors. This step may help improve the balance sheet of AMCs and distributors, but may affect the returns of investors.