Mutual Funds
How mutual fund houses are using close-ended schemes to overcharge investors

Certain fund houses are charging investors an additional 20 basis points, which the regulator gave as an incentive for crediting exit loads back to the scheme, even though the schemes are close-ended


Over the past one year, as many as 40 close-ended equity schemes have been launched. However, for the investor, such schemes not only turn out to be illiquid but expensive too, thanks to our regulator and greedy fund houses.


In August 2012, the Securities and Exchange Board of India (SEBI) issued a press release on mutual fund regulations which mentions that “the entire exit loads would be credited to the scheme while the AMCs will be able to charge an additional expense ratio to the extent of 20 bps”. It seems that close-ended schemes that do not allow investors to exit, are taking undue advantage of the ‘incentive’ given by the regulator, by charging the additional expense ratio.


As per SEBI regulations, fund houses can charge an expense ratio of up to 2.50% for investment management and advisory fees. Additional expense of up to 30 bps can be charged based on the inflows from beyond the top 15 cities. Additional expense of 20 bps is allowed for recurring expenses, an incentive given by the regulator to fund houses as exit loads are credited back to the scheme. Therefore, adding the above expenses, a fund house can charge an expense ratio of up to 3%.


On an average, a single close-ended scheme is able to gather assets of just about Rs100 crore-Rs200 crore. The expense ratio of these schemes is anywhere between 2.80%-3% annualised. The average expense ratio of the 200-odd equity diversified schemes in existence works out to 2.40%. Of the 22 close-ended equity schemes that have disclosed their expense ratio, six schemes have charging an expense ratio of 2.80% and above.


Fund houses prefer to launch close-ended schemes as the assets are locked-in for the tenure of the scheme. It can be seen that most fund houses are charging the full expense ratio for close-ended schemes, where ideally, the total expense ratio should be a maximum of 2.80%. As SEBI has not specifically mentioned the relation of the additional expense ratio to the exit loads charged in the regulation, fund houses are taking undue advantage because they can charge an additional 20 bps irrespective of whether or not exit loads are charged.


At the losing end is the investor who ends up paying an additional cost. Unfortunately for them, they can’t even exit the scheme and would end up paying the high expense ratio.


In the press release at the time of forming the regulation, SEBI mentioned that “This will not result in any additional cost to the investors.” Unfortunately, the regulator failed to do a thorough research. Will the regulator act now seeing that fund houses are taking undue advantage?


Source: ICRA Online




3 years ago

SEBI should ask all fund house to run only Max of 10 funds not more
than that.Just by calling by different names we cant allow them to keep on floating funds.


3 years ago

The responsibility of the Mutual Funds cease with inserting certain clauses in the Risk Factors. Of course, not all mutual funds can be blamed alike but certainly the majority. While the expense ratios are the maximum permissible, the transactions and administration expenses need to be pruned to a reasonable level by the mutual funds concerned without vitiating the purpose. With more and more mutual funds start operating more and more schemes, there is ample scope for the analysts to critically view this part while the funds' concerned claim tall performance, though the investors' money has eroded in fact. Also SEBI should initiate punitive measures against the funds which makes false and misleading claims on their performance including merger of schemes. After all, if one has to go by the investment themes, invest for long term in investibles and forget and in a booming market, it is an automatic process. With the intervention of mutual funds, who are considered to be specialists with all the infrastructural advantages on their hand, what is expected is sound and prudential operations so that the NAV goes up in a solid manner. No mutual fund is required to make a negative NAV.

KIM Infrastructure & Developers restrained from mobilising funds

The company and its directors are to wind up the existing collective investment schemes and refund the monies collected by the said company under the schemes with returns within a period of three months from the date of this Order


Prashant Saran, whole time member, SEBI, has passed an order on KIM Infrastructure & Developers Limited and its directors direct them viz.,  Ravinder Singh Sidhu, Rajesh Kumar,  Sukhpal Singh Barar and  Sanjib Sikdar, not to collect any money from the investors or launch or carry out any collective investment schemes.
They are to wind up the existing collective investment schemes and refund the monies collected by the said company under the schemes with returns within a period of three months from the date of this Order and thereafter, within a period of fifteen days, submit a winding up and repayment report to SEBI.
They are not to alienate or dispose off or sell any of the assets of KIM Infrastructure & Developers Limited except for the purpose of making refunds to its investors as directed above; to immediately submit the full inventory of the assets and properties owned by KIM Infrastructure & Developers Limited.
They are not to access the securities market and are prohibited from buying, selling or otherwise dealing in securities market for a period of four years.
Further, former directors of the company, Palwinder Singh, Rana Raminder and Satnam Singh are restrained from accessing the securities market and would further be prohibited from buying, selling or otherwise dealing in securities market for a period of two years.
The company was engaged in fund mobilising activity from public by floating/sponsoring/ launching collective investment scheme (CIS) as defined in section 11AA of the SEBI Act, 1992.


Ex-parte order on Unicon Capital Services
Directors and key management personnel of Unicon Capital Services are prohibited from accessing the securities market by a SEBI order.
Rajeev Kumar Agarwal, whole time member, SEBI, passed an order restraining Unicon Capital Services Pvt. Ltd. and its directors, namely, Gajendra Nagpal and Ram Mohan Gupta and its two key management personnel , Pawan Dhanuka and Pritam Pandya from accessing the securities market.
They have been prohibited (by the SEBI order) from buying, selling or dealing in securities market, either directly or indirectly or being associated with the securities market in any manner whatsoever, with immediate effect, till further directions.
The order was passed for their having failed to act in accordance with the requirements of the SEBI Act, 1992, the SEBI (Merchant Bankers) Regulations, 1992, the SEBI (ICDR) Regulations 2009 and SEBI circular dated January 4, 2005.


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