Adapting to the changing times is necessary for one’s survival. And if one rejects or refrains to change with the changing times, it surely leads to his or her downfall. With the focus shifting more towards investor interests’ and education & awareness, the capital market regulator – Securities and Exchange Board of India (SEBI), has brought in a slew of changes for the mutual fund industry. Thus, the mutual fund industry has to mould itself to the changing environment in order to ensure its survival in a highly competitive financial services market.
Starting today i.e. October 01, 2012, investments in mutual funds will get simpler and safer as the mutual fund industry will have to implement some wide-ranging reforms enunciated by SEBI. Some of the various reform measures to be followed by the fund houses from October 01, 2012 include:
- Exhaustive disclosures in order to protect the interest of investors
- Shift to the one plan per scheme model(moving away from the present practice of cluttering one scheme with numerous plans)
- Charge expense ratio based on the penetration to small cities
- Set aside a portion of their assets (AUMs) for investor education and awareness
In addition to the above measures, SEBI has also allowed the fund houses to levy brokerage and transaction costs, which is incurred for the purpose of execution of trade and is included in the cost of investment, with a ceiling of 0.12% in case of cash market transactions and 0.05% in case of derivatives transactions. However, the amount incurred as expense on account of inflows from cities (other than top-15 cities) would have to be credited back to the scheme in case the said inflows are redeemed within a period of one year.
Among other measures, the fund houses would have to calculate the Net Asset Value (NAV) of the scheme on daily basis and publish the same in at least two daily newspapers with nation-wide circulation. Also, any exit load charged by the fund houses would have to be credited to back to the scheme.
We are of the view that, the changes brought about by SEBI will help investors to know their mutual fund schemes and enable greater transparency. But the move by SEBI to increase the expense ratio (by 30 basis points) in order facilitate inflows from places beyond top-15 Indian cities; in our view would be detrimental in the interest of the existing investors of the scheme and those living in top-10 cities, as the additional expense ratio (of 30 bps) would be charged to the entire fund.
As far the move to introduce ‘one plan per scheme model’ is concerned (wherein the mutual fund schemes will have to merge all the different plans offered such as retail, institutional, etc.), the fund houses will have to take extra care while managing the liquidity, as any redemption pressures from the institutional investors may put pressure on the entire mutual fund scheme.
The directive of setting aside portion of a mutual fund’s assets (AUMs) for investor education and awareness could get several investors on the learning curve and may promote financial literacy which could eventually help investors to take prudent investment decisions.