Indian Mutual Funds among cheapest globally…

These are the kind of news developments which are barely discussed in India’s financial media.

The shaping of Indian mutual funds has been a story which has few parallels in stories of India’s financial sector. All of this has been happening pretty silently as multiple actors along with the regulator have coordinated to make things more transparent and less costly for small investors. Our banks keep doing poorly despite layers of supervision but mutual fund industry just keeps moving along. I know there is scope for improvement which should be the case, but we have come a long long way from how mutual funds were bought and sold.

Apparently, the regulator wants to lower the expenses of managing these funds. The question is how costly are India’s mutual funds at the first place?

With talk of markets regulator Securities and Exchange Board of India (Sebi) wanting to reduce the permitted expense ratios for mutual fund schemes, the Foundation of Independent Financial Advisors (Fifa) says Indian funds are among the least expensive globally.

The body has contradicted a report on expense ratios brought out by MF tracker Morningstar last year. Morningstar had computed the total expense ratio, or TER, for equity funds to be 2.65 per cent for India. Fifa says its study shows the TER for equity-oriented funds is 2.07 per cent, or 1.81 per cent after reduction of service tax charges of 14.5 per cent. This makes India the fifth least expensive of the 25 countries reviewed by Morningstar last year.

“The long-term returns post expenses earned by investors in Indian equity funds are far superior to returns earned in funds in other countries. An analysis of the TER as a percentage to the returns earned would be the best in India,” said the Fifa report.  TER is the annual charge deducted from the net asset value of the scheme towards administrative, management and all other expenses. Typically, the larger the scheme, the lesser is the TER charged.

…..

Sebi is likely to lower the ceiling for TER charged by MFs. Sources said Sebi wants to effect a slabwise reduction in total expenses charged. At present, equity schemes can charge 2.5 per cent for the first Rs 100 crore of assets managed, 2.25 per cent for the next Rs 300 crore, two per cent for the subsequent Rs 300 crore and 1.75 per cent for the balance. An extra 30 basis points can be charged on these respective slabs for inflows outside the top 15 locations. However, Sebi is also considering lopping off this 30 bps incentive for garnering assets from smaller cities.

The proposal to reduce the expense ratio is in line with last year’s Sumit Bose committee report.

This whole transaction cost analysis of MFs is really interesting. One is wondering what are the expense ratios of other financial institutions as well? What is it for banks? For NBFCs? I will not be surprised if MFs have the lowest expense ratios compared to all the other financial firms..

Coming back to MFs, further decline of expenses augurs well for investors.

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