Small funds big shots

All battle for assets under management between fund houses are not fought in the marketplace. There is enough stealth warfare happening under the surface to fill several John Grisham books. One old battle is between smaller fund houses and the bigger ones over costs. The small guys grudge the huge spends that the big funds manage to make. The race for larger assets under management is also about having control over larger spending budgets that in turn allow the fund to grow faster.

Smaller fund houses have been trying to put caps on expenses of the big fund houses by lobbying with Sebi and the media to get the regulator to impose individual cost limits to different heads. Today the allowable expenses have a blanket cost cap. The proposal has been shot down several times before, but according to some news reports, the attempts are still on. Sebi rules put caps on what the fund can charge the investors each year on annual charges. But even within these limits, a 2 per cent annual fee on Rs 1,000 crore of assets gives Rs 20 crore of expenses while a smaller Rs 100 crore fund will only gather Rs 2 crore.

What a fund can charge to the assets under management becomes important to you, the investor, because this is the money you pay each year out of your money invested with the fund, whether or not the fund makes a profit. Also, some expenses that are not to be charged to the fund are sometimes sneaked in. For example, mutual funds are not allowed to charge brand building advertisement costs to the fund. This means that the investors should not pay for the mutual fund spending on ads that aim to establish the brand of the mutual fund house rather than give any specific information about a scheme. Any ad that looks like a promotion for a fund house and then, in a two second frame, shows the name of a specific scheme, like such and such Income Fund, is usually charging the cost of the ad to the investors.

The companies will fight for their slice of the cost pie, but it is in the investors’ interest to look for lower cost funds since even small looking expenses can add up to substantial amounts over the long term.