Investments in mutual funds will get simpler and safer– but a bit costlier in some cases– starting tomorrow as the industry is set to implement some wide-ranging reforms by market regulator Sebi.
Among various reform measures taken by Sebi (Securities and Exchange Board of India),the fund houses will have to make more disclosures in the interest of investors. They also have to shift to the one plan per scheme model,moving away
from the present practice of cluttering one scheme with numerous plans.
At the same time,fund houses will be able to charge their investors a little bit more as incentive for expanding to small cities,but would also have to set aside a small portion of their assets for investor education and awareness.
The changes in mutual fund regulations were approved by Sebi’s board in its last meeting on August 16 and have been notified over the past few days. Now,these would come into effect from tomorrow,October 1.
As per the notifications,the fund houses might charge investment and advisory fee on their schemes,which would have to be fully disclosed in the offer document. In case of a fund of funds scheme,the total expenses of levied on the scheme would be capped at 2.50 per cent of the daily net assets of the scheme.
In addition to the total expenses already levied on schemes,Sebi would allow the fund houses to levy brokerage and transaction costs,which is incurred for the purpose of execution of trade and is included in the cost of investment,with a ceiling of 0.12 per cent in case of cash market and 0.05 per cent in case of derivatives transactions.
Besides,mutual funds can charge additional expenses of up to 0.30 per cent of daily net assets,if the new inflows from places other than top-15 cities are 30 per cent of the gross new inflows in the scheme,or are 15 per cent of the average assets under management (year to date) of the scheme,whichever is higher.
The expenses charged under these clauses would have to be utilised for distribution expenses incurred for bringing inflows from such cities,and the amount incurred as expense on account of inflows from such cities would have to be credited back to the scheme in case the said inflows are redeemed within a period of one year.
Among other measures,the fund houses would have to calculate the Net Asset Value (NAV) of the scheme on daily basis and publish the same in at least two daily newspapers with nation-wide circulation. Also,any exit load charged by the fund houses would have to be be credited to back to the scheme.
The measures also include capping of the total additional expenses at 0.2 per cent in normal case. These steps would encourage long-term holding and help reduce churn and align interests of the fund houses and distributors with that of the investors.
These measures would not result in any additional cost to investors,but the provision for additional expenses of up to 0.3 per cent for inflows from smaller cities could it costlier at investor-end.
Also,mutual funds have been allowed to charge service tax on investment and advisory fees to the scheme. These are in addition to the maximum limit on total expense amount.
The single plan structure would apply to all new mutual fund schemes with effect from tomorrow,while existing schemes with multiple plans (based on investment amount) can also accept fresh subscriptions only under one plan. Other plans
will continue till the existing investors remain invested in the plan.
With regard to distribution of mutual fund products,a new cadre of distributors,such as postal agents and retired government and semi-government officials,teachers,and bank officers with a service of at least 10 years can be be allowed to sell units of simple and performing mutual fund schemes.
These ‘simple and performing mutual fund schemes’ would include diversified equity schemes,fixed maturity plans (FMPs) and index schemes with returns equal to or better than their scheme benchmark returns during each of the last three
These new cadre of distributors would require a simplified form of NISM certification and AMFI Registration.
The new regulations would also require fund houses to make half-yearly financial results within one month of the end of every six-month period. Also,the mutual funds would have to make monthly portfolio disclosures,while they would have to disclose additional details in the interest of investors.
In another benefit for small investors,cash investments of up to Rs 20,000 per investor,per mutual fund would be allowed every financial year without PAN,but repayment in form of redemptions,dividend or any other form would be paid only through a banking channel.
The debt funds would also have to ensure that they are not over-exposed to a particular sector.