SEBI New Rule: The Indian market regulator, SEBI, is preparing to make major reforms to the mutual fund fee structure. In its recent consultation paper, SEBI suggested that mutual fund houses will now be able to charge different fees based on their fund’s performance, i.e., performance-linked expense ratio. Currently, this model is optional, but the regulator wants to implement it more systematically.
If SEBI’s proposal is implemented, it would mean that when a fund outperforms its benchmark, the asset management company will be allowed to charge higher fees. However, if the fund underperforms, investors will be charged lower fees. This model will be directly linked to the fund’s performance, increasing the fund manager’s accountability.
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Potential Benefits for Investors
BPN Fincap Director Nigam says this move could prove beneficial for investors. According to them, when fund fees are linked to fund performance, fund managers will be under pressure to outperform their benchmarks. Investors will also feel more confident investing in funds that consistently deliver superior returns. The corporation believes that investors will be willing to pay slightly higher fees for well-performing schemes because they are receiving value.
Increased Accountability and Responsibility
Experts say this reform will further strengthen fund manager accountability. While fund managers currently work in the best interests of investors, this model will directly impact their organization’s earnings. This means that not only launching a fund but also maintaining its consistent performance will be equally important.
A Better Way to Measure Returns
Market experts believe that if performance-based fees are implemented, returns should be calculated not just on an annual basis but through rolling returns. Rolling returns reflect the fund’s consistent performance over different time periods. This reduces the impact of short-term market fluctuations and provides a glimpse of actual performance.
A Major Step Towards Transparency
SEBI has also proposed that mutual fund companies must publicly disclose the full details of their Total Expense Ratio. This means investors will now be able to know which expenses are being charged to their funds. This step will make the investment process more transparent and increase investor confidence.
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Efforts to Reduce Investment Costs
SEBI has proposed another major step towards reducing additional expenses faced by investors in mutual fund schemes. This includes removing the additional 5 basis points (bps) charge levied on a scheme’s assets under management (AUM). This will reduce overall expenses for investors and provide them with better returns over the long term.
Proposed Changes to the Tax Structure
SEBI has suggested that taxes be separately reflected in the expense ratio. That is, the expense ratio limit will be reduced so that the tax burden is passed on to investors in a transparent manner. Future changes in tax rates will be directly passed on to investors, thus eliminating confusion.
New Flexibility in AMC Business Models
According to the proposal, asset management companies (AMCs) may be permitted to provide investment management and advisory services to non-pooled funds, subject to certain conditions. However, the team, data, and decision-making processes must remain completely independent. This move aims to protect the safety and interests of small investors, ensuring that there are no conflicts of interest.