What SEBI tweaks mean for investor

SEBI has unleashed a new set of guidelines for the Mutual Fund industry, applicable from last month. Here is what they mean to investors.

One Plan only : Now there is no confusion as to which plan to invest in — Regular/Institutional/Super Institutional; fund houses have been directed to simplify their plans and offer just one. Retail investors will thus have access to lower expense ratios earlier available only to institutional investors. Prior to October 1, investors above a threshold investment (typically Rs 1 crore) were eligible for the institutional option with lower expenses.

Expense ratio : SEBI has given leeway to funds to charge a higher expense ratio (30 basis points, 0.3 per cent higher) for a certain volume of business from beyond the top 15 cities. However, there are conditions to this: inflows from beyond the top 15 cities have to be 15 per cent of the size of the fund, on an average year-to-date basis, otherwise the higher expenses may be charged on a proportionate basis. The other condition is, the additional expenses so charged shall be clawed back if those investments are redeemed within one year. What this means is that if a fund were to start focusing on cities beyond the Top 15 cities with immediate effect, it can charge the higher expenses only on a proportionate basis.

When we look at the spectrum of funds available, only a few are near the ceiling of 2.5 per cent, hence only those few may take advantage of the higher expense leeway granted now. This is specially true of products like ultra short term funds. It does not matter whether the law allows the fund to charge 2 per cent or 3 per cent as expenses, they currently charge much less.

If we look at the benefits of the single plan structure discussed above, investors should not be unduly bothered about the additional expenses allowed.

Service tax : The burden has shifted to the investor now, but the Indian economy is moving from manufacturing-driven to service-driven and more and more services are coming under the tax ambit. Mutual fund services should be no exception. It is now optional for an AMC to charge the service tax to the investor, and if it does, it will mean higher charges for the customer.

Exit load : While a fund can charge 0.20 per cent additionally as expenses, the exit loads collected would now go to the scheme (meaning existing investors) rather than to the AMC. Like we discussed in “Expense Ratio’, it is only in those funds that are near or at the ceiling of eligible expense ratio that this would make a difference.

Clear funds rule : Currently, funds allot units to investors on the day the money is available for investment by the AMC and not on the day the application is made. Earlier, larger investment sums of over Rs 1 crore alone were eligible for same day NAV. Now that has been made applicable to retail investors. The benefit of application-day NAV would be for retail investors only, investing less than Rs 2 lakh.

(The author is Sr. VP - Advisory Desk - Fixed Income, BNP Paribas Wealth Management)