The capital market regulator – SEBI (Securities and Exchange Board of India) is considering a proposal wherein the fund management fees charged by equity mutual funds, will be linked to the performance of the scheme.
The proposal for “returns-linked management fee” was discussed at a meeting with investor associations last week. An internal discussion paper on this also said, “For investors, to pay the maximum amount in a scheme, which is consistently underperforming in relation to its benchmark is unreasonable and part of the burden should be shared by the mutual fund.”
The regulator looking into the proposal, has suggested that equity mutual fund schemes underperforming within 5% of their benchmarks, can continue with existing structure. But for those underperforming over 5% of their benchmarks, a graded system of decreasing the fee should be considered, after taking into account the number of years the scheme has been in existence.
(At present equity mutual funds charge a maximum of 1.75% as fund management fees, irrespective of how they fare on the returns front.)
While reacting positively to this, but not expressing too much excitement Mr. Vijai Mantri – MD and CEO of Pramerica Asset Managers said, “Conceptually, it is a good proposal. However, one has to consider the practical aspects too.”
In our opinion if such a proposal goes through, it will be in the larger interest of investors as mutual fund houses would be made more accountable and responsible (on the return front), before charging any fund management fee. Also in our opinion, it would also end the race for increasing Assets Under Management (AUM). But this in turn may also lead to fund managers indulging in “momentum playing” rather than “investing”, which would lead to high churning of their equity fund’s portfolio (which will increase transaction cost) as they attempt to increase returns.
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jayantaao@gmail.com
Jan 04, 2011
It is a better idea and in favor of investors, as it is seen from the activities of some mutual fund houses as they are investing individuals money for the profit of their hidden scripts and agendas od market. they should be accountable and penalised or awarded for his peroframnce related to their capabilities of return , as this is a basic motto of investment. Only taking a risk of market mere by investor is not a good idea irresspective of capabilities of fund management. |
VPNambiar@gmail.com
Jan 06, 2011
It is a right approch to bring some accountability- Reward/ penalise for the fund manager's actions.We often find different funds perform differently. NAV and gains are vastly apart, yet managers are rewarded well!. Thw same approach is also considered in PMS managers of many financial houses. They are to be compensated only according to their performance. Very often we find they churn the folios to make money their broker house, forgetting their clients. |
priyaflorence@gmail.com
Jan 06, 2011
Fully support this. Will be better for the consumer, as long as MFs don't find a way to subvert it. |
bkkundu@yahoo.com
Jan 07, 2011
This is the only correct idea to save all Investors from all Inefficient Fund Management. But what about the Brokers and Banks who charge 1% right in the beginning irrespective of future peformance of the Funds? That fees should also be asper performance subject to maximum of 1% and should be charged after the first year only. |
research@personalfn.com
Jan 07, 2011
Dear Mr. Bimal Krishna Kundu,
Yes, you are right -mutual fund advisors may charge you a certain fee when you enter the fund. But in order to ensure that you are investing in the right mutual fund scheme, consider consistently performing schemes; which will safeguard your porfolio when the markets turn turbulent. Always prefer an advisor who puts his client's interest first, before his own.
Thanks,
Team PersonalFN |
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