For quite some time, we have been debating over direct versus distributor, lowering the cap on expenses, additional expenses for selling mutual funds to B30 locations (beyond the top 20 locations) and expenses for compensating exit load, among other issues. The ultimate variable for these exercises is the expense ratio that the asset management company (AMC) is allowed to charge, and the underlying theme is that lower the expenses charged, higher the return to the customer. However, what’s being missed out in the debate is the performance of the fund. When an investor enters a direct plan and the fund underperforms the peer group, she is left only with the psychological satisfaction of having paid a relatively lower charge to the AMC than the regular plan customer.
Let us look at the issue of mutual fund expense ratio from a different perspective: performance-based variable expenses. While implementation of a model for variable expenses will be complicated and subject to debate, let us start the debate now. The timing is opportune as the Securities and Exchange Board of India (Sebi) is contemplating bringing down expense ratios further. I propose the following model of charging expenses:
