From 1st October, investing in mutual fund schemes will become costlier. The expense ratio could go up by an additional 45 basis points. Long-term investors would be penalised, fund companies would be the only ones benefiting and SEBI once again has showed that it couldn’t care less about investors
The Securities and Exchange Board of India (SEBI) has announced the rules for its latest experiment with mutual funds. From 1st October, mutual fund houses can charge an additional total expense ratio (TER) up to 30 basis points (bps) on daily net assets of the scheme depending on the new inflows from beyond top 15 cities. To charge the additional TER asset management companies (AMCs) would have to ensure the new inflows from beyond top 15 cities are at least 30% of gross new inflows in the scheme or 15% of the average assets under management (year-to-date) of the scheme, whichever is higher. AMCs will not be disappointed, because even if they bring in a lower percentage of inflows from beyond the top 15 cities they would be able to charge an additional TER depending on the new inflows from beyond top 15 cities. However, if the new investments from these cities are redeemed before one year the additional TER will be clawed back. But who would keep a track of the latter as SEBI has not demanded any disclosure of the same. In effect, fund companies have a got a licence to charge you more with low accountability.
The new circular also allows AMCs to charge service tax on investment and advisory fees to the scheme, in addition to the maximum limit of TER. Management and advisory fees, which is the largest component of the TER, is subject to a maximum limit of 1.25%. If we consider service tax of 12.30% on this 1.25%, AMCs would now be able to charge an additional TER of 15.4 bps. Service tax other than investment and advisory fees, if any, shall be borne by the scheme within the maximum limit of TER. This would take the total additional TER up to 45 bps. In a recent article we showed the negative impact of additional 30 bps TER to long-term investors, by adding service tax to this it will only get worse. (Please see: Much-maligned entry load was a cheaper option!)
AMCs would now be required to have one single plan for retail and institutional investors subject to a single expense structure. Existing plans would continue till existing investors remain invested. From 1 January 2013, fund houses would have to provide a separate plan for direct investments, “such separate plan shall have a lower expense ratio excluding distribution expenses, commission, etc, and no commission shall be paid from such plans. The plan shall also have a separate NAV.” Investors of these plans can expect a lower expense ratio of up to 1% which is the sub-limit for marketing and selling expenses including agents” commission and statutory advertisement. However, it is not clear if there would be the additional TER charged depending on the inflow from beyond top 15 cities into these plans. Entry load was banned over three years back to reduce the costs for investors, but how many actually took this opportunity to invest in mutual fund schemes?
There would be a new cadre of distributors—postal agents, retired government and semi-government officials and other similar persons who shall be allowed to sell units of simple and performing mutual fund schemes. They would require a simplified form of NISM certification and AMFI Registration. But would they be able to deliver adequate financial advice? (Read about it here)
AMCs shall annually set apart at least 2 bps on daily net assets within the maximum limit of TER conduct investor education and awareness initiatives. Given our understanding of how this money was spent in the past, they will use it to promote their own products and partners.
Other changes include the cash investments in mutual funds to the extent of Rs20,000 per investor, per mutual fund, per financial year in order to help enhance the reach of mutual fund products amongst small investors, who may not be tax payers and may not have PAN/bank accounts, such as farmers, small traders/businessmen/worker. AMCs would have to make additional disclosures similar to what was proposed in the board meeting. And distributors can opt-in or opt out from accepting transaction charge depending on the product type.
SEBI has left out two points brought up in the board meeting—the fungibility of TER and the additional 20 bps in TER to curb churning as the entire exit loads would be credited to the scheme. For the second SEBI had mentioned that “this will not result in any additional cost to the investors”.
There was lot of confusion on this point as calculations showed that if the amount generated through TER is greater than the amount generated through exit load, this would then be an additional cost to the investors. SEBI seemed to realise this and left out the point. That’s a small mercy.
The new changes would have a significant impact on the industry. Long-term investors would be penalised, AMCs would be the only ones benefiting and SEBI once again has showed that it couldn’t care less about investors.
In the food articles category, pulses turned expensive by 34.4% in August, wheat by 12.9%, cereals by 10.7% and potato by a whopping 68.9% on an annual basis
New Delhi: Inflation rose to 7.55% in August as prices of potato, wheat and pulses as well as manufactured items soared, which may restrain Reserve Bank of India (RBI) from cutting interest rates at its monetary policy review next week, reports PTI.
Inflation, as measured by the wholesale price index (WPI), was 6.87% in July. In August last year, however, it was 9.78%.
Overall, food inflation declined to 9.14% in August, from 10.06% in July. Food articles have 14.3% share in the WPI basket.
In the manufactured items category, prices rose for cotton textiles, paper and paper products, cement and lime.
The rate of price rise in the manufactured products was 6.14% in August, as against 5.58% in July.
In the food articles category, pulses turned expensive by 34.39% in August, wheat by 12.85% and cereals by 10.71% on an annual basis.
Besides, potatoes turned costlier by 68.86% and rice by 10.29%.
Inflation in eggs, meat, fish prices was 13.77%, while in milk and fruits it was was 6.68% and 1.14% respectively.
Vegetables became costlier by 9.98% in August, year-on-year. Inflation in this segment was 24.11% in July.
However, the pressure on prices of onions declined during August to (-) 20.67%.
In non-food articles, inflation in oil seeds was 28.33%, fibres (3.53%) and minerals (9.74%).
Besides, inflation for June was revised upwards to 7.58%, from 7.25% as per provisional estimates.
The Reserve Bank is scheduled to come out with its policy review on Monday in which it is likely to hold policy rates steady as inflation still remains above comfort zone.
Economists feel that the decision to hike diesel prices has provided room for RBI to ease monetary policy to give thrust on growth