Short term pain for long term benefit
SEBI,in its board meeting,a day after the independence day celebrations,made a slew of game changing announcements that are likely to have a significant impact
SEBI,in its board meeting,a day after the independence day celebrations,made a slew of game changing announcements that are likely to have a significant impact on the reach of mutual funds MFs as an investment option among the masses. The impact of these rules can be mixed on the returns and costs for an investor.
Among the key announcements that are likely to impact investors existing as well as new,were an enhancement in the Total Expense Ratio TER charged to a scheme by 0.30 per cent if at least 30 per cent of the fresh inflows in that scheme are from areas other than the top 15 cities. The term top 15 cities has not been defined by Sebi yet. In case inflows from areas other than top 15 cities constitute less than 30 per cent of fresh inflows,the additional TER shall be reduced proportionately. Whereas the intent behind this step is to increase penetration of MFs in smaller towns and cities,it is the investors from top 15 cities that will have to mainly compensate for the additional costs. On its own,this move may result in returns from a scheme getting lower by 0.3 per cent. Also,with AMCs being allowed to charge service tax on investment management fees,to the scheme,the return to the investor shall be affected by a corresponding amount.
Whilst the above two measures may lead to escalation in cost to the investor,certain other announcements will lead to lowering of costs too. For instance,Sebi has mandated that all exit loads shall be fully credited to the scheme. Against this,the AMC can however charge additional expenses of 0.2 per cent to the scheme. This plough back of exit loads shall enhance the returns of the investors,though it may be offset partly by the additional expense of 0.2 per cent.
The regulator has also brought in the concept of the direct investor,also known as do-it-yourself investor. Direct investors shall be a separate investor class in a scheme and shall be charged marginally lower expenses than those who wish to avail the services of a professional advisor or distributor. Though Sebi has not mentioned the exact quantum of the lower expense ratio,the move is likely to benefit investors who wish to plan and execute their investments themselves.
In another significant move to make mutual funds accessible to more number of people,Sebi has allowed cash transactions investment as well as redemption up to R 20,000. This shall enable people who dont have bank accounts and PAN,to invest in mutual funds.
Another move that can have a significant impact on the returns of investors is the capping of transaction costs to 0.12 per cent in case of cash markets and at 0.05 per cent for Futures and Options market. With the expenses being capped,any transaction costs over and above the limit shall have to borne by the AMC. Naturally,this would lead to lower churning of portfolios and hence lower costs. The flip side of this step is that it discourages active portfolio management. Active portfolio management helps the portfolio manager generate alpha even when markets are range bound. In absence of this,returns to investors may suffer in range bound markets.
In order to curb mis-selling and protect the interest of the small investor who comes into the fold of mutual funds as a result of these steps,Sebi has included mis-selling as a fraudulent and unfair trade practice under Sebi regulations,which means that instances of mis-selling shall now carry harsher penalties.
On the whole,the announcements are aimed at increasing the reach of MFs among the masses as a vehicle for mobilising household savings into more productive sectors capital markets instead of less productive areas gold and property for the growth of the economy. This may increase the costs to investors marginally,but also brings with it higher access as well as better returns in the long term.
Author is MD,Bajaj Capital
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