The mutual funds industry may be allowed to increase the total expenses ratio as well as some flexibility in fixing the ceiling of expense ratio. A formal decision, in this regard, is expected within a month.
Expense ratio is a measure of what it costs an investment company to operate a mutual fund. Operating expenses are taken out of a fund's assets and lower the return to a fund's investors.
The Finance Ministry, in a statement after a meeting with SEBI and fund houses, said, “The immediate plan includes steps that may have to be taken to energise the distribution network and to provide greater flexibility to Asset Management Companies to manage the Total Expense Ratio (TER).”
The meeting was chaired by the Economic Affairs Secretary, Mr R. Gopalan, and attended by SEBI officials besides top officials from the mutual funds industry.
Issues
During the meeting, the representatives from the MF industry raised several issues relating to compensation payable to the distributors and the increasing preference of investors for other asset classes. The steps outlined for attention were categorised into immediate- and medium-term plans.
The meeting got importance after the Prime Minister told the Finance Ministry officials on June 27, after taking charge of the Finance portfolio, to resolve issues relating to the mutual funds industry.
Mr R. Gopalan said, “There are issues of short-term and taxation nature. Those are to be fast tracked. We need to work out a balance so that the industry grows.”
The industry has been requested to study in depth the taxation issues and submit their proposals to the Government. The medium-term plan would include the greater role for pension and insurance sectors in further augmenting the MF industry.
Suggestions
The industry suggested that exit load should be credited to the particular scheme and not to the asset management company. At present, the fund houses levy exit loads ranging from 1-3 per cent, depending on the time of exit.
Regarding tax issue, Mr H.N. Sinor, CEO of Association of Mutual Funds of India, said “Service tax should be borne by consumers and should be kept out of the total expense ratio.”
The industry also proposed that asset management for Insurance and pension sectors should be done by the mutual funds industry. At the same time, it asked for a 401K-like system as in the US, which will allow automatic deduction from salary for investment in mutual funds industry.
Talking about the increase and flexibility in expense ratio, Mr Dhirendra Kumar, CEO of Value Research said, “Increase in ratio will have very little impact on the investor. Flexibility will have no bearing on the fixed income fund. At the same time, for other schemes, asset management companies will spend less on management expenses, giving room for enhancing the efficiency and in turn profitability.”
shishir.s@thehindu.co.in