SEBI Calls For Investor-friendly Reforms For Mutual Funds
The mutual fund industry generally showcases its performance against a benchmark, such as the BSE 500 or the NIFTY. However, while the performance of the mutual fund scheme is a function of dividend as well as the capital gains made on investments, the returns on the benchmarks do not take dividend income into account
The SEBI (Securities Exchange Board of India), which regulates the Mutual Fund industry in India, looks all set to roll out a new set of reforms within the space. With their collective assets hurtling towards the 20-lakh crore (20 trillion mark), and retail participation rising significantly due to the growing popularity of SIP's, the forward-thinking regulator appears to be adhering to the old adage - "a stitch in time, saves nine"
Going by recent comments from G. Mahalingam, Whole Time Director, SEBI, it seems likely that expense ratios are set for another round of trimming soon. "This is a good time for the industry to shrink profits and bring in more investors into their fold", he had said at a recent FICCI event.
Expense ratios, which represent the total costs that an Asset Management Company incurs in operating a fund, are presently capped at 2.5% for equity funds and 2.25% for debt funds. A Morningstar report published some time back, had revealed that the overall level of expense ratios for Indian Mutual Funds is significantly higher than those of its global peers. The FIFA (Federation of Independent Financial Advisors) had later refuted these claims, stating that international mutual funds are 'unbundled' in nature, and this complicates the process of estimating the actual cost of fund ownership borne by end investors - rendering any comparison with Indian Mutual Funds moot.
Notably, the capping of expense ratios and removal of front end loads have been met with consternation from the Mutual Fund distribution community, who have long argued that their pay-outs (indirectly linked to the total allowable expense ratios) are already significantly lower than the commissions earned by Life Insurance agents, who earn as much as 30-35% of first year premiums as upfront revenues.
The regulator also indicated that they may be directing Asset Management Companies to consolidate some of their schemes. Currently, there are thousands of Mutual Fund schemes available, with many schemes from the same AMC being very similar in their asset allocations and investment strategies. Consolidation, along with the simplification of nomenclatures for funds, will go a long way in easing the trepidation that many first-time investors feel while foraying into Mutual Funds.
SEBI is also likely to urge Mutual Funds to disclose their performances vis a vis the TRI or "Total Returns Index", a measure that takes a multitude of factors into account, including dividend incomes earned over the investment period.
The mutual fund industry generally showcases its performance against a benchmark, such as the BSE 500 or the NIFTY. However, while the performance of the mutual fund scheme is a function of dividend as well as the capital gains made on investments, the returns on the benchmarks do not take dividend income into account.
Total return includes interest, capital gains, dividends and distributions realized over a given period of time, and hence reflects the actual rate of return of an investment or a pool of investments over a given evaluation period.
Last month, DSP BlackRock Investment Managers Pvt. Ltd., one of India's leading asset management companies, announced that it would be disclosing performance of its active equity mutual funds with the TRI as a benchmark.
"Our move to disclose returns against TRI will help in giving the right picture of the real alpha generated by active fund management. The alpha that is shown currently may look overstated as dividends are not added in benchmark returns. At a time like this, when we are seeing very high flows, we want our investors to have a true picture of the alpha generated and also to have the right expectations from their investments", said Kalpen Parekh, President, DSP BlackRock Investment. He added that benchmarking to TRI is a step towards responsible and transparent communication with their advisors and investors.
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