Sipping coffee at an industry event, Ajit Menon, CEO, Pramerica Mutual Fund, a veteran in the MF industry with over two decades of experience opined that 2018 has been the most eventful year ever for mutual funds. “I have seen a lot of changes throughout the year be it ban in upfront commission or re-categorization of schemes. I can say this is the most eventful year for AMCs and distributors.”
Let us quickly recap the key events of 2018
Shift to all trail model: On October 22, 2018, SEBI banned upfront commission in mutual funds and directed fund houses to follow all-trail model to compensate their distributors. Also, fund houses have started paying such commissions from scheme and not from AMC book. In addition, SEBI has asked fund houses not to do upfronting of any trail commission. However, fund houses can do upfronting of trail commission on SIPs subject to fulfilment of pre-defined conditions.
In addition, fund houses can give additional incentive to B 30 distributors but only through trail commission.
However, the good part is that fund houses can continue to hold and provide training sessions to their distributors but they cannot reward or give non-cash incentives to them.
Rationalization of TER: In the first phase of rationalization of TER, SEBI lowered the additional expense charged in lieu of exit loads by mutual fund schemes from 20 basis points to 5 basis points.
Recently, SEBI introduced new TER based on AUM of the scheme. With this, the maximum TER that equity funds and debt funds can charge will be 2.25% and 2%, respectively. Similarly, fund houses cannot charge more than 1.25% in close end equity funds and 1% in close end debt funds.
Another effort to reduce TER is limiting additional expenses of 30 bps for penetration in B30 cities to retail AUM. Fund houses can charge this additional expenses only if assets come from retail investors.
Reclassification cities for additional TER: SEBI has revised the definition of top cities and beyond top cities for additional TER. With this, T15 and B15 have become T30 and B30.
Introduction of Total Return Index (TRI) to benchmark performance: SEBI instructed fund officials to benchmark their schemes against TRI, a benchmark that captures dividend income to give distributors and hence provides a more complete picture of fund performance vis-a-vis its benchmark.
Unlike traditional benchmarks, which do not take into account dividend income, TRI includes interest, capital gains, dividends and distributions realized over a given period of time.
Uniform practice of market capitalization: AMFI has started ranking stocks based on their market capitalization for the mutual funds. AMFI says that large cap stocks are the 1st to 100th companies in terms of full market capitalization. While mid cap stocks comprise 101st to 250th companies, small cap stocks consist of beyond 250th companies in terms of full market capitalization.
Emergence of online distributors: Online distributors like ET Money, Paytm and MobiKwik have rolled out their financial distribution and advisory business. E-commerce giants like Amazon and Snapdeal are also in the fray – Amazon already owns a stake in online distribution and robo advisory firm, BankBazaar and Snapdeal has invested in financial services startup Rupeepower, which helps people compare credit cards and loans across banks.
Completion of re-categorization of MF schemes: In 2017, SEBI came out with uniform definitions for fund categories to reduce the number of schemes in mutual funds. With this, SEBI broadly divided mutual funds into five categories – equity funds, debt funds, hybrid funds and solution oriented funds and other funds. However, AMCs either merged or consolidated their schemes to streamline their offerings this year. The aim is to create uniformity across fund houses and simplify investing for mutual fund investors.
Reintroduction of capital gains tax: The government has imposed long term capital gains tax of 10% on equity funds. However, this tax is applicable only if the capital gains exceed Rs.1 lakh. Also, there will be no indexation benefit given to investors on equity funds.
For existing investors, the government has grandfathered all gains up to January 31, 2018. This means, irrespective of the price you bought the share or units of MFs, the government would consider the highest price quoted on January 31, 2018 as the date of acquisition of shares or units of MFs.
Also, the government has imposed a dividend distribution tax of 10% on equity funds.
Aadhaar based eKYC no longer valid: The apex court has ruled that financial institutions such as banks, mutual funds and insurance companies cannot make Aadhaar mandatory for investing in mutual funds or buying insurance policies. Following this, UIDAI asked KYC registration agencies (KRAs), fund houses and R&T agents to stop doing Aadhaar based authentication for eKYC.
Equity fund performance: Value Research data shows that barring large cap funds and technology funds, all equity fund categories have delivered negative returns in the last one year. Small cap funds and mid cap funds are the worst affected with negative returns of 19.33% and 12.82%, respectively last year. Also, most equity funds have failed to beat their respective benchmarks.
