SEBI May Consider These 2 Options For Mutual Fund Performance Based Fee Plan

May 09, 2023

The market regulator, Securities Exchange Board of India (SEBI), has recently considered to allow a new category of mutual funds in which the fees of the asset manager will be partially correlated with the performance of the funds. The implementation of the aforementioned proposal to permit mutual funds to apply performance-based fees was being developed by SEBI's mutual fund panel.

Having a Base Total Expense Ratio (TER) and allowing mutual funds to impose performance fees over this is one of the structures SEBI is contemplating about. The total annual expense ratio, or TER, is what mutual funds charge their investors.

According to recent discussions, the market regulator is considering at least two distinct options for mutual funds to charge investors a performance-based fee. In contrast to other asset managers who are free to collect this incentive from clients, such as Alternative Investment Funds (AIFs) and Portfolio Management Services (PMS), this entails adding fixed and variable fee components, although they might be subject to regulatory caps.

The market regulator has considered this approach in light of the identifying that many actively managed funds fail to outperform their specific benchmark indices. However, there is not enough data available on this fee structure and SEBI has not yet released any official information about implementation of performance-based fees for mutual funds.