Some funds are re-routing applications of the top 15 cities through other cities to claim the additional expense ratio at the expense of investors. This is exactly what we had suggested would happen in a Moneylife seminar on mutual funds recently

Fund houses are allowed to charge an additional total expense ratio (TER) of up to 30 basis points (bps) based on inflows from beyond 15 cities, as per regulations of the Securities and Exchange Board of India (SEBI). According to The Economic Times, mutual fund companies are said to be directing applications from top 15 cities through other cities to show a higher inflow from beyond the top 15 cities to grab the extra expense. Such malpractices were bound to happen. An unaccountable and lackadaisical SEBI has a left a huge gap in regulations which is being exploited by fund houses. In a special seminar on the new rules conducted by Moneylife Foundation on 26 September  (Read: Mutual Funds Seminar: How will SEBI's new rules affect your investment?), Debashis Basu, editor and publisher of Moneylife magazine, brought up this fact and had forecast that fund houses would find a way of earning this additional fee, considering that major inflows come from the top 15 cities. As per the latest AMFI report, as much as 87% of the assets managed by mutual funds come from the top 15 cities. Before this regulation came in force from 1 October, we had mentioned that the calculation is complicated and there is low accountability. (Read: Mutual funds to be expensive from 1st October)

Moneylife contacted the Association of Mutual Funds in India (AMFI) to seek a clarification on the calculation for the additional expense ratio, whether it would be done on the basis of the address in the KYC documents or on the basis of from where the application has been filed. AMFI refused to divulge any information on this. However, according to a source from the fund industry, there is no clarity on the calculation for the additional TER. Up to 31 March 2013, additional TER charged would be based on the inflow from the respective city and post that it is likely to be based on the pin-code of the address mentioned in the KYC document. However, no official confirmation has been received, said the industry source. Till then it is likely that fund houses looking to gain that additional fee would re-route applications of top 15 cities through other smaller towns and cities and take advantage of the huge loophole left by unaccountable and lackadaisical SEBI officials.
 

1. But still, this is just the first part of the clause to increase penetration beyond the top 15 cities. The second part states that the claw-back of additional TER charged, if the inflow from beyond 15 cities is redeemed within a period of one year from the date of investment. However, at present, there is no clarity if there are any checks for the same. The regulator’s move in order to ‘benefit’ the industry without any accountability seems to benefit just the asset management companies.