Now that the dust has settled on the capital market regulator Securities and Exchange Board of India (SEBI)’s consultation paper on the rationalisation of total expense ratio (TER), it is time to debate its implications going forward in the event it gets implemented in toto.
One of the sore points for the mutual fund houses is the proposal to bring brokerage and research costs within the TER limit. SEBI’s viewpoint is that the mutual fund houses have been paying research fees to brokerage houses, which in their opinion amounts to double-charging investors who pay management fees to the fund house.
Now, mutual fund schemes often transact in securities through stockbrokers. These stockbrokers are paid fees by mutual funds for trade execution as well as related services including research. While SEBI points out in its consultation paper that over 40 mutual fund houses paid out around R3,500 crore in FY2021-2022, there is a counter-argument that a panel of stockbrokers is a globally accepted practice in the fund management business.
Then, there is also the issue of Impact Cost that needs to be factored in as one of the reasons to filter transactions through a stock broker, besides the attendant benefits of sell-side research. It has been counter-suggested that the larger AMCs could consider taking limited-purpose membership of stock exchanges to carry out their trades to minimise costs.
Finally, the issue of uniform TER across all schemes seems to have divided the industry. While it appears favourable for small and mid-sized mutual funds, the larger ones appear less cheerful about it.
Having presented some of the key takeaways, it is now worth looking at the impact. The objective of SEBI to reduce costs for investors is commendable. The suggestion of a performance-based fee for mutual fund houses too appears a revolutionary step and it is unlikely that there will be too many complaints against that one.
However, the repeated cutting of costs in what is indisputably an already highly regulated industry will shrink the margins of mutual fund houses. This could eventually result in a squeeze on salaries and in the process, if experienced fund managers choose to seek alternate job pastures, the performances of these mutual funds could suffer. If that happens, who the end loser could be is clear.
Somehow, this reminds me of the time I met the promoter of a no-frills budget airline at the time of its IPO who claimed he would constantly push costs down to the minimum. Having reviewed his already well-tightened cost sheet, I expressed apprehension about whether he meant optimising Air Turbine Fuel (ATF) costs by flying the plane with just half its tank full.
He saw the funny side of my interjection, but I wonder who will be left laughing if SEBI implements its consultation paper sans any leeway to the mutual fund industry which has improved its penetration and grown to a size of R40 lakh crore.
My hunch is, better sense will prevail and a mid-way path will be adopted. After all, there is a commonality of interest in the well-being of investors who are the industry’s customers and SEBI's responsibility.
Ashok Kumar
Head of LKW-India.
He can be reached at ceolotus@hotmail.com
(Views expressed here are personal)