Indian mutual fund industry scored a grade C+, which indicates that India has a mix of outstanding practices and others that fail to meet global standards, reveals Morningstar Global Fund Investor Experience 2015 Report. The report assessed the experiences of mutual fund investors in 25 countries across North America, Europe, Asia, and Africa.
Morningstar evaluated countries on four parameters - regulation and taxation, disclosure, fee and expenses, and sales and media. Morningstar researchers generally favor active fund regulation; a low investor tax burden; more disclosure; lower fund fees; a varied fund distribution system; and local news media that helps to educate investors about their choices, stated a press release issued by Morningstar.
The report showed that Korea and the United States as the most investor-friendly markets and China the least investor-friendly market.
Highlights of India’s grade include:
- A particularly notable feature of the Indian fund market is the lack of any asset-based commissions. India also prohibits funds from charging performance fees, which is commendable and atypical among the countries in the survey. However, Indian funds still have average-to-expensive total expense ratios overall for equity and allocation funds.
- In the regulation and taxation category, India receives a B- grade. India is one of only a few countries in the report that continues to have capital controls, which limits investors' ability to invest in foreign securities.
- SEBI has mandated AMCs to invest 1% of the amount raised in NFO (subject to a maximum of Rs.50 lakh) in all open ended schemes during its life time as seed capital. Morningstar considers the requirement a positive step as it aligns the interests of the fund company with that of investors.
- In the disclosure category, India received a C+ grade. India requires disclosure of full fund portfolio holdings monthly instead of on a semiannual basis typical of other markets evaluated in the report. India is one of only two countries that hold this distinction. Investment strategies and risks found in fund documents, however, are typically generic and provide little useful information.
Other key findings of the 2015 report:
- Korea received an A this year because of its improved sales practices, up from a B+ in 2013, and is the only other country aside from the United States to achieve the top grade.
- The United States garnered the highest score for the fourth time with a top grade of A. While the United States boasts relatively low expenses and strong disclosure, its Sales and Media category grade is average.
- The Netherlands rose to an A- grade in 2015, compared with a B in 2013, improving in the areas of fees and expenses and sales and media assisted by a newly implemented ban on advisor commissions.
- Finland received an average grade of B-, reflecting consistent practices that have developed from pan-European regulations.
- China received the lowest grade of a D+ because of high fees, limitations on overseas investing, and restrictions on foreign-domiciled funds.
- Since the 2013 study, regulators in New Zealand introduced semiannual portfolio holdings disclosure, while Thailand plans to move from semiannual to quarterly disclosure. Australia is now the only market that does not implement portfolio holdings disclosure requirements. The global fund industry is generally ahead of regulatory requirements, with monthly holdings releases becoming common.
- Nearly every market has enacted new or updated regulations over the past two years, which shows active engagement by regulators in the areas Morningstar evaluates in the report.
- In the United States, Australia, South Africa, and The Netherlands, ongoing fund fees are typically unbundled, which decreases reported fund fees. However, if investors are paying for both advice and an administration platform, the total cost of owning a fund could be an additional 1.0 to 1.5%.
- In 22 of the 25 countries evaluated, banks and insurance companies are named as one of the dominant fund sales channels. The next most common channel, cited in seven countries, is the independent advisor.
