Mind your expenses
Mutual Fund Insight|February 2023
More than the quantum, it's the way expense ratios are configured which needs a rethink
ASHUTOSH GUPTA
Mind your expenses

SEBI recently initiated a study of existing fees and expenses charged by mutual fund houses. While AMC bosses usually view such initiatives as another exercise in trimming expense ratios, I think SEBI should look at two other urgent issues that need fixing.

First is that AMCs are paying higher commissions for newer funds, potentially creating incentives for distributors to churn investors' money, a malpractice SEBI has worked hard to discourage over the years.

Second, higher commissions of new funds have led to exceptionally low expense ratios for their direct plans. While it may be a blessing for now, it will eventually impact directplan investors negatively once AMCs stop promoting these funds aggressively and reduce the commissions.

Both these matters have significant implications for you, the investor, and therefore must not be ignored.

Need for SEBI scrutiny

Before examining these issues more closely, let's begin with a more fundamental question: is SEBI really unfair in its unrelenting focus on costs? Well, even if the expense ratio is over-regulated, I think that's how it should be. While you normally expect market forces to take care of prices in a competitive and transparent industry, mutual funds, particularly equity funds, are a strange beast. Performance in this industry is such a big driver that if a fund does well, expenses don't matter - even if they are on the higher side. Conversely, if a fund doesn't do well, even lower expenses wouldn't count much. Therefore, the need for regulatory intervention to protect investors.

Without a tight regulatory leash, mutual funds could have easily gone the PMS or ULIP way. Do you remember they would charge as high as 6 per cent in the name of initial-issue expenses to launch a new fund? 6 per cent! If not for SEBI's heavy crackdown, the mutual fund industry would have been happily fleecing you to this day.

This story is from the February 2023 edition of Mutual Fund Insight.

Start your 7-day Magzter GOLD free trial to access thousands of curated premium stories, and 8,500+ magazines and newspapers.

This story is from the February 2023 edition of Mutual Fund Insight.

Start your 7-day Magzter GOLD free trial to access thousands of curated premium stories, and 8,500+ magazines and newspapers.

MORE STORIES FROM MUTUAL FUND INSIGHTView All
International Mutual Funds Find Flavour But Lose Favour
Mutual Fund Insight

International Mutual Funds Find Flavour But Lose Favour

Despite stellar performance, these funds are cold-shouldered by investors

time-read
3 mins  |
September 2023
The Dose Makes The Poison
Mutual Fund Insight

The Dose Makes The Poison

Are your fund investments diversified? Or are they diworsified? Here’s the solution

time-read
5 mins  |
September 2023
'Since Sahi Hai drive launch, industry has grown over twofold'
Mutual Fund Insight

'Since Sahi Hai drive launch, industry has grown over twofold'

The AMC’s marketing and corporate communication head also lauds MFCentral and MF Utility

time-read
3 mins  |
September 2023
'Earlier, not many knew of mutual funds; now SIP is a verb'
Mutual Fund Insight

'Earlier, not many knew of mutual funds; now SIP is a verb'

The CMO also explains how 4G, fintechs have elevated mutual funds’ reach

time-read
4 mins  |
September 2023
'MFCentral is the most impressive of online platforms'
Mutual Fund Insight

'MFCentral is the most impressive of online platforms'

Shah says though passive funds are growing, there’s a long road ahead

time-read
3 mins  |
September 2023
'Fintechs are driving mass financial inclusion'
Mutual Fund Insight

'Fintechs are driving mass financial inclusion'

Shah also lauds the pace at which distributors have embraced technology

time-read
2 mins  |
September 2023
'A Maldives tour guide knew of the Mutual Fund Sahi Hai drive'
Mutual Fund Insight

'A Maldives tour guide knew of the Mutual Fund Sahi Hai drive'

Interaction with Edelweiss’s senior VP and head of products and marketing

time-read
3 mins  |
September 2023
'More distributors will come to MFCentral, MF Utility'
Mutual Fund Insight

'More distributors will come to MFCentral, MF Utility'

Goyal feels they can grow their business five times, 10 times with tech

time-read
3 mins  |
September 2023
'The size of passive funds has grown 36 per cent in a year'
Mutual Fund Insight

'The size of passive funds has grown 36 per cent in a year'

Parija explains how mutual funds have gained traction

time-read
5 mins  |
September 2023
Tomorrow, and tomorrow, and tomorrow...
Mutual Fund Insight

Tomorrow, and tomorrow, and tomorrow...

There are a total of about 1.1 lakh crores of rupees invested in India’s mutual funds and the number of investors is now about 12 crore

time-read
4 mins  |
September 2023