Fund houses are likely to hike the total expense ratio (TER) in regular plans of liquid funds to comply with AMFI’s new guidelines on commissions from June 2015. AMFI has exempted liquid funds from the new commission guideline for 60 days starting April 01.
Currently, fund houses compete on wafer-thin margins in liquid funds to remain competitive. AMCs typically pay commissions in liquid funds out of their own pocket because of low TER. However, from June 2015, they have to account it within the TER, which means that investors will have to take a hit up to the extent of commission paid to distributors. According to AMFI’s new guidelines, the commission will be paid on distributable TER, which is gross TER minus operating expense.
“If the operating expense in a liquid fund is 8 basis points, 2 basis points goes to investor awareness fund, and 5 basis brokerage, the TER works out to 15. Even without charging management fee to the scheme, the TER of liquid funds can go up to 25 basis points across industry,” explained the CEO of a bank sponsored fund house.
“Liquid funds currently charge very low expense ratio. Liquid funds will also come under the new commission guideline from June 2015. Thus, the TER has to go up in regular plans,” said Jimmy Patel, CEO, Quantum Mutual Fund.
SEBI rules permit fund houses to charge a maximum of 1.50 % fee on AUM of Rs. 700 crore and above (excluding additional 30 basis points for B15 inflows) in liquid funds. However, fund houses do not exhaust the upper limit to remain competitive as even a slight increase in TER negatively impacts returns.
Experts say that some AMCs are managing liquid funds virtually at zero cost to attract large investors.
As on December 2014, retail investment in liquid funds stood at Rs. 1,933 crore, which is 1.08% of industry’s total Rs. 1.78 lakh crore AUM in liquid funds. Liquid funds typically charge around 0.05% in direct plans and around 0.25% in regular plans.
