AMFI to tweak MF ranking process, cut expense ratio

The Association of Mutual Funds of India is planning to discontinue revealing mutual fund ranking based on overall asset under management (AUM) and work out a new system to grade them based on their retail AUM.

Setting the agenda for the forthcoming AMFI meeting on September 16, its Chief Executive Officer HN Sinor said the ranking published on AMFI website combines AUM of all products, thereby giving a misleading picture with no clarity on retail product assets.

“I am wondering whether we can move away from the present system of AMC-wise overall AUM disclosure to only AMC-wise retail AUM. We, however, need to debate on the composition of retail AUM,” he  told AMFI directors in a letter. AMFI is expected to discuss the composition of retail AUM at its meeting. The change in disclosure will reveal the quantum of retail participation in MF as most large fund houses attract less retail investment but their AUM is big as they manage large corporate investments, said an analyst.

In another interesting development, AMFI is considering scrapping the concession given to MFs for attracting investment from beyond top 15 cities (B-15).

At present, MFs are allowed to charge an additional 30 basis points (0.30 per cent) to the total expense ratio if 30 per cent of the fresh fund flow is from B-15 cities. According to Sumit Bose Committee recommendations on Measures to Curb Mis-selling and Rationalising Distribution Incentives, MFs and distributor should tap such unexplored markets on their own to increase sales and market share. 

AMFI wants the MF industry to consider voluntarily slashing expense ratio by 10 bps (0.10 per cent) from October 1 and progressively adopt a reduction of 20 bps (0.20 per cent) in two equal instalments between next April and October.

SEBI has capped the total expense ratio for equity schemes at 2.5 per cent of the net average asset and 2.25 per cent for debt schemes. The total allowable expense ratio, including the sops for B15 mop-up, is limited to 2.8 per cent and 2.55 per cent in the case of equity and debt funds, respectively.

In another major blow, the Committee has recommended that the upfront commission paid to distributors be discontinued. Distributors should not be paid advance commissions by dipping into future expenses, MFs own profit or capital, said the report.