So far, you have heard about zero TER funds and performance linked fees. However, US based fund company Salt Financial has launched a fund with negative fee structure.
The fund company’s new ETF will pay management fee of 0.05% from its pockets till the fund reaches an asset size of $100 million or April 30, 2020, whichever is earlier. This means, for every investment of $10,000, the fund company would add $5 to the scheme. Once the fund crosses $100 million in assets, it would start charging 0.29% as the management fees. A rough calculation shows that the fund company has budgeted $5,00,000 for this activity.
Dhirendra Kumar, CEO, Value Research believes that the fund company would pay for initial set up fee on its own. “Looks like this US fund company is inspired by Indian e-commerce model where such companies absorb cost to extend discount to customers. Also, if you look at the cost involved in this activity, it is just an initial set up fee. They usually spend such an amount on PR activities. However, in my view, investors should not look at cost while investing their money. Instead, they should invest in funds based on its merit.”
Vishal Kapoor, CEO, IDFC Mutual Fund feels that initially discounted pricing is tactical and used largely in consumer product promotions, and more recently by e-commerce companies to build scale. He suggested, “The fund company seems to using an early-bird discount for investment. One has to careful, since such models may not always work in favour of long term investors. In this case, the fund would charge reasonable fee once it reaches a certain size. In my view, investors should invest their money by looking at quality of the fund house and track record of the fund, and take a long term view.”
Globally, many fund houses in developed markets lend stocks and use synthetic replication strategy to reduce costs. “While they earn interest through lending stocks to short sellers, in synthetic replication, instead of holding any underlying securities, funds use derivatives to track underlying index to reduce their cost next to negligible. However, both these models are not prevalent in India,” said a senior fund official requesting anonymity.