Equity funds get costlier for investors

The industry has seen an average of 13% increase in total expense ratios (TER) in equity funds.

Mutual funds, which were among the least expensive products for investors so far have now become costlier after a SEBI ruling which allowed fund houses to charge higher total expense ratio (TER).

Earlier in 2012, SEBI had allowed fund houses to charge an additional TER of up to 30 basis points if the net inflows from beyond top 15 cities are at least (a) 30% of gross new inflows in the scheme or (b) 15% of the average assets under management (year to date) of the scheme, whichever is higher.

While the industry has seen 13% average hike in expense ratios, some funds have hiked expenses by as much as 30%. Funds like IDBI Top 100 Equity, LIC Nomura Growth, Principal Tax Savings and Birla Sun Life Frontline Equity have seen more than more than 30% hike in their expense ratios, shows Value Research data.

Between September 2012 and September 2013, sector funds like banking, pharma and FMCG have witnessed highest increase in their expense ratios.  While expense ratio of banking funds has increased by 26%, both pharma and FMCG saw a hike of 19% TER.

Also, the regulator had restricted fund houses from using money collected through exit loads towards sales and marketing. However, SEBI allowed them to collect exit load charge of 20 bps to compensate for the exit loads.

Simply put, fund houses can now charge up to 3% TER in equity funds.

Vidya Bala, Head - Mutual Funds Research, FundsIndia.com is of the view that the additional expense ratio has been helping the industry to spread its footprint in B-15 cities. Currently the B-15 cities account for nearly 14% of industry’s AUM, up by a percent compared to FY 2012-13. She, however, said that the higher costs are eating up returns of investors.

“Additional TER of 30 bps has helped industry in raising resources for increasing its footprint in small cities and town,” says Rajan Ghotgalkar, Managing Director, Principal Mutual Fund.

Some believe that fund houses have been opportunistic in raising their expense ratios to benefit from the rising markets.

“Charging an additional expense ratio is optional for fund houses. If you go through the data, you will find out that some fund houses have increased their footprint in B-15 cities without raising their expense ratios. Also, as the market sentiment is improving, some fund houses have started charging more. This will help such fund houses to make a windfall gain in favourable market conditions,” says a Mumbai based IFA.

A senior official from a mid-sized fund house said that the industry is attracting investors due to investor awareness initiatives and not necessarily due to deeper penetration. According to him, charging an additional expense ratio may not help increase penetration of mutual funds in hinterland. SEBI has mandated fund houses to spend 2 bps of total asset under management on creating awareness about mutual funds.