The Securities and Exchange Board of India (Sebi) may hike the expense ratio of mutual funds with conditions. The markets regulator may increase the total expense ratio for mutual funds from the present 2.25% and allow additional incentives for systematic investment plans (SIPs),a finance ministry official said on Thursday after a meeting with the fund managers. Changes in tax structure for mutual fund can be taken up only in the next Budget,the official said.
The official also ruled out reintroduction of entry loads in the MF industry. Sebi is also considering additional incentives for selling mutual funds in Tier 2 and Tier 3 cities. We took stock of the basic concerns of the mutual fund industry. They have given us a host of suggestions including on taxation. Changes in taxation cannot be done immediately. It can be taken up only in the next budget, the official said. The MF industry has asked for tax sops on pension plans at par with the benefits available under the new pension scheme (NPS).
The other changes in expense ratio,SIP and fungibility can be announced on July 17 after SEBIs advisorys board approves it. The total expense ratio hike could be conditional, the official said,but did not elaborate the conditions and the quantum of hike.
The measures are being taken after Prime Minister Manmohan Singh,who took on the additional charge of the finance ministry recently,said the government needed to resolve issues relating to mutual funds and the insurance industry. Fresh inflows into mutual funds have dried up in the past three years,since entry loads,which were used to incentivise distributors,were banned in 2009.
A higher expense ratio would make the mutual funds business viable,without having to suffer the side-effects of bringing back entry loads. Higher expenses mean money at the disposal of the MFs to spend on variety of activities,including promotion of products. The mutual fund industry saw a net inflow of only Rs 122 crore in 2011-12,while there was an exodus of Rs 13,139 crore in 2010-11,as per AMFI data. Mutual funds had aggregate AUM of Rs 7 lakh crore as on May 31 in all schemes,as per Amfi data.
Mutual funds are allowed to charge various administrative and maintenance expenses annually. A 25 basis points increase in the expense ratio would result in mutual funds annual income increasing by as much as 11%.