The Securities and Exchange Board of India (Sebi) has proposed a fresh overhaul of mutual fund expenses, seeking to rationalise the total expense ratio (TER) and enhance transparency across the industry. While the proposals aim to make mutual funds more investor-friendly, they also raise questions about how fund houses, distributors and investors will adapt to a lower-cost regime.
In an exclusive conversation with BW Businessworld, Ajay Patwari, Co-founder, MINTIT, shared his views on Sebi’s proposals and their likely implications for the mutual fund ecosystem. He believes the move marks a corrective step that will push the industry towards greater efficiency and scale.
Though shrinking margins could pressure asset management companies (AMCs) and distributors in the short term, Patwari argues that growing volumes will more than compensate, driven by rising investor participation and expanding market depth.
Edited excerpts:
Sebi has proposed a reduction in the total expense ratio (TER) of mutual funds. How would it impact the mutual fund industry?
The Sebi’s consultation paper wherein they have identified certain areas like brokerages charged on trades, GST on expenses other than management fees, performance-linked charging of expense ratio, allowing AMC's to set up advisory services through subsidiaries etc. where changes are proposed to be made.
All these changes are under proposal stage, however, once implemented it will definitely be a corrective step towards taking this industry to greater heights.
How do you see this impacting the mutual fund industry as a whole, particularly AMCs?
The answer lies in volumes. The current AUM of the mutual fund industry is at Rs 75 lakh crore, which in comparison to the global market is just a fraction. As we move forward to multiply this number, all the stakeholders are poised to benefit out of volumes. Margins may shrink but volume will compensate.
From a distributor’s perspective, do you think this step will make mutual funds more investor-friendly or could it have unintended consequences?
Sebi’s primary objective is to protect investor's interest. They will always keep their interest on priority and steps like these are intended to promote mutual funds as an affordable instrument to invest. Lower the cost, better the returns for investors.
When you deal with people's trust, it is a thin balance between looking at your own earnings or prioritising their objectives. The moment trust is taken care of, volumes flow and that is how distributors will also eventually earn.
Could lower commissions lead to a decline in investor handholding and after-sales service?
The answer to this lies in the way distributors operate. If it is a man power heavy mode then yes, it will definitely have an impact as the cost towards rendering continued service will be higher than the earnings.
To prove this, we have more than 1.75 lakh AMFI registration number (ARN) holders as of now but if you take the number of ARN's having sizable assets under management say more than Rs 50 crore, it's not more than 10,000.
How do you think AMCs will respond to these regulatory changes? Could we see cost-cutting, product redesign, or even consolidation in the sector?
Any decision or consultation paper released by Sebi is taken by keeping AMC's as well in loop. As we evolve and the depth increases, there will be evolution in the product range and strategies. Consolidation is something which might happen as any business that is running is for profitability.
Investors often see regular mutual funds as expensive compared to direct plans. If SEBI reduces the TER, do you think this could make regular plans more appealing to retail investors?”
If TER gets reduced, both the mutual funds plan, direct as well as regular will come under the vicinity. Value addition that the investor gets is imperative. Money management unfortunately is not taught in our country anywhere in the curriculum and hence, we are still bound to learn on our own.
In today's times where access to information is huge and easily available, there is growing interest in investors to prioritise cost over value which is not wrong if investors are competent. However, during adverse market cycles, I believe in "The best math one can learn is to calculate the future cost of current decisions.” |
