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SEBI reforms seem to benefit AMCs

SEBI reforms may help improve the balance sheet of AMCs and distributors, but may affect the returns of investors

August 23, 2012 3:57 IST | India Infoline News Service
Capital market regulator SEBI (Securities and Exchange Board of India) announced a number of changes to increase the penetration of mutual fund products and to protect the investors’ interest.

On 16th August, SEBI in its board meeting had taken note of the lack of penetration of mutual fund products, inadequate distribution network, need for greater alignment of the interest of various stakeholders, regulation of distributors and issues concerning investor protection, and had approved some immediate steps. SEBI has representatives from the Ministries of Finance and Corporate Affairs and Reserve Bank of India.

However, some of the SEBI decisions seem to benefit asset management companies (AMCs) rather than investors. The new rules that allow higher expense ratios to AMCs have failed to discuss the issue of poor performance of mutual fund schemes.

According to the SEBI announcement, depending upon the extent of fresh investments from cities beyond the top 15 cities, AMCs would be allowed to charge an additional TER (Total Expense Ratio) up to 30 basis points (bps).

The SEBI circular said, “AMCs will be able to charge 30 bps if the new inflows from these cities/towns are minimum 30% of the total inflows. In case of lesser inflows the proportionate amount will be allowed as additional TER.” The additional TER will be on the entire corpus of the fund house and not only the fresh investments. This step may help improve the balance sheet of AMCs and distributors, but may affect the returns of investors.

AMCs with the maximum presence in semi-urban and rural regions are likely to benefit the most. However, in these regions, the awareness about MF schemes is less. There have been cases of mis-selling due to which people in smaller cities and rural areas are unwilling to invest in MFs. There is no mechanism to ensure that investors from these cities are protected against poor performance. Given the added incentive AMCs would push their products to the customers whether it would serve the lay investor or not.

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