SEBI has asked fund houses to reduce the total expense ratio (TER) in mutual funds for investors, said G Mahalingam, Whole Time Member, SEBI. He was addressing fund officials and distributors at the fourth Mint mutual fund conclave held recently in Mumbai.
He said that the industry is having good times and good times are the best times to take bitter medicine.
Explaining the rationale behind the proposal, Mahalingam said, “There are areas where we need to work further. One is the TER. We are consulting the industry to understand what we can do in this area. How do we shrink it further? How do we ensure that the investors get better deal? This is something, which we need to work on so that our jurisdiction does not jut out in comparison to some of the advanced countries in terms of TER.”
A CEO of a foreign fund house told Cafemutual that SEBI wants to bring down the TER cap in mutual funds to 2%. One fallout of reducing TER, he said is that it may limit the commission paying capacity of AMCs. He said, “Globally, costs are coming down. If TER comes down, naturally, fund houses cannot pay the commission they are paying today. IFAs cannot expect to increase their revenues through higher commissions.”
The only way for IFAs to grow is use technology to grow volumes. “IFAs can grow business by increasing sales volume with the help of technology,” he added.
Here are the other key takeaways from his speech
- SEBI to come out with the uniform definitions for MF categories
- It is desirable for funds to benchmark their schemes against Total Return Index (TRI), a benchmark that captures dividend income.
- Share of direct schemes has been going up in terms of gross inflows.
- Industry’s efforts to penetrate into B15 cities has been bearing fruits with share of AUM from B15 cities increasing from 14.2% in March 2014 to 17.8% in March 17.
- Industry should improve the quality and content of IAPs.
- It is in industry’s benefit to follow Amfi’s best practices guidelines in letter and spirit. The industry will be better off treating them as non-negotiable..
- The industry needs to pay more attention to ETFs. ETFs are making a very reluctant entry into India. And mutual funds are the place to ensure that ETFs grow fast.
- The industry may reach Rs.50 lakh crore in the next 5-6 years.
