In a blow to the mutual fund sector, the Securities and Exchange Board of India (Sebi) has rejected its request to be allowed to set aside fees for investor awareness programmes as a proportion of only equity assets.
This would mean fund houses would have to cough up around five times more money than they had wanted to for this expenditure.
Last month, Sebi had asked asset management companies (AMCs) to set apart at least 0.02 per cent of daily net assets annually for investor education and awareness initiatives. This had not gone down well with fund houses, who requested for shifting this charge from overall assets to only equity assets.
“Sebi did not heed our request, which I believe was quite a genuine one,” said a chief executive officer (CEO) who was privy to last week’s meeting at the Association of Mutual Funds in India.
Statistics from Sebi show the MF sector’s net assets under management (AUM) as on August 31 was Rs 752,548 crore, while equity net assets were Rs 176,080 crore. So, a fee of two basis points on overall net AUM would be Rs 150 crore; if only on equity assets, it would have been only Rs 35 crore. “The difference is huge. It will have its impact on the profitability of fund houses,” said the CEO. This comes at a time when a majority of the 44 fund houses are making losses.
According to sector officials, a larger portion of the assets are from institutions, which do not need awareness programmes, being well informed about their investments. “So, there is no point of charging fees on institutional money, where profit margins are minimal,” says the executive vice-president at a foreign fund house.
For instance, as on March 2012, institutional money constituted 94 per cent of the assets in the liquid and money market segment, one of the largest sub-sectors in MFs. In gilt funds, institutional money comprised 70 per cent of assets in the category; in debt-oriented funds, more than half came from institutional investors. It was only in the equity segment where retail and high net worth individuals dominated, with around 90 per cent of assets, a segment where the expense ratio has always been on the higher side.
Such fees should have been only on retail assets, as customers in this segment need to be educated, said the national sales head of a mid-sized fund house. Adding: “In the current scenario, it looks like as if retail investors are being subsidised by institutional customers.”
An independent expert, who did not wish to be named, agrees with the sector’s argument. “Sebi wants increase in penetration for mutual fund products. That can come only from beyond the top cities. It’s a good step to ensure more awareness-related workshops but it would pinch fund houses,” he said.