Sebi set to bring down mutual fund fees

After the hint from North Block that Budget 2006 will hold out some 8216;non-tax8217; incentives to attract retail investors to mutual fun...

After the hint from North Block that Budget 2006 will hold out some 8216;non-tax8217; incentives to attract retail investors to mutual funds, here8217;s some more good news for existing and potential MF investors. Market regulator Sebi is about to make changes in MF8217;s fee structures so that the impact cost for investors is reduced.

A senior Sebi official told The Indian Express, 8216;8216;We are undertaking a rationalisation of mutual funds8217; fee structures. This will lead to a reduction in fees charged on investors.8217;8217;

MFs charge two type of fees on investors8212;entry loads and annual management expenses. While annual management fees have a ceiling of 3 per cent, the entry load, charged at the time an investor joins a fund, is around 2.25 per cent.

However, when investors put their money in a New Fund Offer NFO, MFs are allowed to spend up to 6 per cent of the collections, on top of the 2.25 per cent entry load. However, this 6 per cent is not deducted from investors8217; assets immediately, but over 5 years.

Thus, those who leave the fund soon after a NFO, are not affected, while those who stay back bear an unfair amount of the burden. Dhirendra Kumar from Value Research, a fund-tracking firm, says, 8216;8216;This is grossly unfair and the root cause for the churn in the industry.8217;8217;

But all this could change soon. The Sebi official says that the problem of excessive churn in investors8217; assets by distributors is also being resolved. 8216;8216;The trail commission structure is also being looked into, in order to curb the excessive churn of investor savings by distributors,8217;8217; the Sebi official said.

Agents currently get an upfront commission and a trail commission that is paid out annually by equity funds if the investors roped in by the distributor stays invested in the fund. But with lucrative upfront commissions, agents prefer rotating investor monies into other new funds, rather than keep them invested so as to get the trail commission, which ranges between an annual 0.5 and 0.7 per cent only.