Sebi Proposes Sweeping Changes to Mutual Fund Regulations, Including Performance-Linked Fees

Strategic Insights -

In a consultation paper released on October 28, the Securities and Exchange Board of India (Sebi) proposed significant changes to the mutual fund regulations, including a 10-15 basis point reduction in total expense ratios (TER) charged by asset management companies (AMCs). The regulator also suggested capping brokerage charges for cash transactions at 2 basis points and for derivative trades at 1 basis point. Furthermore, Sebi proposed enabling expense ratios to be charged on the basis of a scheme's performance, which would be optional for AMCs.

Key Takeaways:

  • Sebi has proposed reducing TER by 10-15 basis points for open-ended schemes and 20-25 basis points for closed-ended ones.
  • The regulator has suggested capping brokerage charges for cash transactions at 2 basis points and for derivative trades at 1 basis point.
  • Sebi has made a provision for enabling expense ratios to be charged on the basis of a scheme's performance, which would be optional for AMCs.
  • Performance-linked fees are easier to apply in individually managed portfolios, such as portfolio management services (PMSes), but are difficult to implement in mutual funds due to their pooled structure and daily net asset value (NAV) adjustments.
  • Experts believe that a fixed-fee structure offers better clarity and predictability for mutual fund investors, while a performancelinked fee model may provoke fund managers to take risk simply to trigger performance incentives.
  • A well-calibrated model can bring accountability without disturbing the core principle of fairness that mutual funds stand for.

Statistics:

  • Sebi proposes reducing TER by 10-15 basis points for open-ended schemes.
  • TER reduction for closed-ended schemes is proposed at 20-25 basis points.
  • Brokerage charges for cash transactions will be capped at 2 basis points.
  • Brokerage charges for derivative trades will be capped at 1 basis point.
  • Mutual fund assets under management (AUM) in India stood at ₹31.29 lakh crore as of March 2022 (Source: Association of Mutual Funds in India).
  • Total expense ratio (TER) of top 10 open-ended equity schemes in India averaged 1.55% as of March 2022 (Source: Value Research).
  • The Securities and Exchange Board of India (Sebi) regulates the mutual fund industry in India.

Sources:

  • Securities and Exchange Board of India (Sebi) consultation paper issued on October 28.
  • "Mutual fund industry sees a surge in foreign investment" by Abhinav Kaul, published on 6 October 2022.
  • "Falling MF schemes raise hopes of inflows" by Abhinav Kaul, published on 22 September 2022.
  • Association of Mutual Funds in India (AMFI) data as of March 2022.
  • Value Research data as of March 2022.