SEBI has asked the fund houses offering the fund of funds schemes to clarify to investors the expense structure that they would adopt in response to the recent regulation.
Further, the regulator has advised fund houses to give unit holders an exit option, if they deem fit to exit before implementation of the new expense structure.
SEBI had, in a July 29 notification, put a cap on the management fee for fund of funds schemes. The notification said that fund of funds can charge management fee not exceeding 0.75 per cent of the total expenses, including management fees, not exceeding 0.75 per cent plus other expenses such as administrative expenses, underlying scheme charges, marketing costs within a cap of 2.5 per cent.
At present, MFs charge investors of fund of funds scheme a fee of 0.75 per cent. Post the new regulations, fund of fund schemes can charge an additional 1.75 per cent as expenses. The expense fees charged by MF houses from investors include redemption expenses, investment management and advisory fees.
SEBI has now directed the fund houses to make investors understand the implication of both the options on his investment. The investor should be explained the new charges that are going to be levied on his investment. This will help him decide whether he wants to stay invested or exit from the scheme.
There are currently 50 schemes in the market in the fund of funds category with an AUM of 2,920 crore.
What is Fund of Funds?
A mutual fund which invests in other mutual funds. Just as a mutual fund invests in a number of different securities, a fund of funds invests in many different mutual funds. These funds were designed to achieve even greater diversification than traditional mutual funds.
However, if the fund of funds carries an operating expense, investors are essentially paying double for an expense that is already included in the expense figures of the underlying funds.
In addition, since a fund of funds buys many different funds which themselves invest in many different stocks, it is possible for the fund of funds to own the same stock through several different funds and it can be difficult to keep track of the overall holdings.