A few industry officials and financial advisors we spoke to feel that such move can deter investors from putting their money in mutual funds.
A recent media report published in the Business Standard says that SEBI is working on a proposal to incentivize fund houses on the basis of the performance of scheme over a period of time.
Simply put, the market regulator is planning to allow funds to charge higher fees in the form of performance-linked fees which have consistently outperformed their respective benchmarks. Obviously, this fees would be over and above the total expense ratio (TER) of the scheme.
Cafemutual could not independently ascertain the credibility of the report. However, this could be a major development if implemented. Hence, we spoke to a few industry officials and financial advisers to find out their perspective on this reported proposal.
Dinesh Khara, Chief Executive Officer, SBI Mutual Fund is of the view that such compensation should be given to those fund houses who have not only consistently outperformed their respective benchmarks but also reduced the risk in their portfolios. “Frankly speaking, the outperformance can be achieved by a portfolio of junk stocks. The market regulator should consider the quality of the fund before taking such decision. A quality fund holds good quality stocks as it reduces the downside risk in the portfolio.”
“From AMCs perspective, it’s a positive development. It will encourage fund managers to generate alpha,” says Aashish Somaiyaa, CEO, Motilal Oswal Mutual Fund.
However, some fund officials have a different view. “Every time when the going is good, we hear about such proposals and developments. Charging an additional fee for performance may not be a good idea. It will cost investors heavily as they are already paying close to 3%. Also, one should consider the flip side of this issue. What if the fund consistently underperforms? Do fund houses agree to return the management fees to investors,” said a Chief Executive Officer of a foreign fund house.
Another senior official from a bank sponsored AMC points out that if performance-linked fees lead to better performance, it would have reflected in the performance of PMS. “In India, hedge funds and PMS are already charging performance-linked management fees from investors. However, these funds have delivered moderate returns and cost investors heavily. I strongly believe that such model would not work in India.”
Currently, most PMS in India charges a performance-linked management fees along with the fixed flat fees.
Manoj Nagpal of Outlook Asia Capital said that such a move can cause a major dent in the fund management practice. “Incentivizing fund houses based on their outperformance can make fund managers divert from the scheme’s objective to generate alpha which will eventually increase the risk. Secondly, there will be a great chance that a fund house can choose an easy benchmark in order to beat it.”
“Typically, equity funds deliver 12%to 18% returns in the long term. And the fund houses charge somewhere around 3% which is 20% of the returns, highest compared to global standards. Hence, instead of incentivizing fund houses, SEBI should put a cap on TER of 1%-1.5% and incentivize them by another 50 bps if fund consistently outperforms its benchmark. This will reduce the expense ratio and encourage more investors to put their money in mutual funds,” says a Mumbai based financial adviser.
Do share your views with us on practicality of this reported proposal.
