Indian mutual funds need to do away with charging double
fees like funds in the US do, if they want to grow and give higher returns for
investors, says Joe Mansueto, founder CEO of Morning Star, world's largest data
provider for the fund industry.
Mansueto believes that Indian mutual fund houses will reduce expense ratios overtime. "Increased competition and pressure from intermediaries to reduce costs will prompt fund houses to lower charges even further," he said.
Expense ratio, in layman's terms, is the percentage of fees paid by an investor to the mutual fund company to manage and operate the fund. Indian mutual funds charge about 1.5-2.5% as expense ratio while managing equity-diversified funds.
Even in the case of ETFs and index funds, which mirror an index and are passively managed, Indian fund houses charge 0.50-0.90% as expense charges. In developed countries, fund houses charge just about 0.75-1.5% while managing active equity funds. According to fund distributors, ETFs are managed at fees as low as 0.10-0.30%.
Indian investors will realise the importance of investing in low-cost funds as they graduate to higher and more sophisticated investment products, Mansueto said. "Expense charges will be a criterion as important as performance. Low-cost funds will become more popular in the years to come. Low-cost funds, like Vanguard, pulled the expense ratio in the US; the same will happen in India," he added.
Investor education is the best way to popularise mutual funds in India, Mansueto said. MF investments continue to be low across both retail and institutional segments. The AUM of Indian MFs as a percentage of GDP is still in singledigits compared to 76% in the US and 41% in Brazil. Household penetration of Indian funds is around 3-4%. Among households, where funds have reached, top eight cities account for 75% of retail AUM.
"Penetration will gain traction in the years to come... Fund houses will be forced to play scale; they'll be able to do it by going to smaller cities," Mansueto said. "Indian investors will stop taking direct exposure to equities in future. The need for diversification, better research, low-asset management charges will force them to invest in markets through funds," he added.
One major trend that is evolving in the fund management industry, according to Mansueto, is that investors are opting for shorter investment horizons. And this trend is not restricted to investors alone. Even fund managers are resorting to frequent portfolios churning, he said.
"In the 80s, there were funds that never turned over stocks even once in a year. Portfolio churning is gaining in proportions now - and this is where even in developed markets like the US," Mansueto said. The need to generate higher gains is prompting fund managers to rely on momentum and churn portfolios, he said. "The dependence on technical analysis over fundamental analysts reminds of what Warren Buffet said.
It's very much comparable to an astronomer who has put aside laws of physics and is now trying to find answers in astrology," Mansueto added. Morningstar also has an advisory business which recommends funds to institutions. The group is a big fan of equities and within equities smallcap companies.
"We've analysed data dating back to a century. Over a long term, stocks outperform bonds and bonds outperform cash. With equities, small-cap outperforms large companies and value outperforms growth companies," Mansueto said, adding, "There could be a tactical tilt to portfolios. But overall, we're overweight on small-cap equities," he added.
Mansueto believes that Indian mutual fund houses will reduce expense ratios overtime. "Increased competition and pressure from intermediaries to reduce costs will prompt fund houses to lower charges even further," he said.
Expense ratio, in layman's terms, is the percentage of fees paid by an investor to the mutual fund company to manage and operate the fund. Indian mutual funds charge about 1.5-2.5% as expense ratio while managing equity-diversified funds.
Even in the case of ETFs and index funds, which mirror an index and are passively managed, Indian fund houses charge 0.50-0.90% as expense charges. In developed countries, fund houses charge just about 0.75-1.5% while managing active equity funds. According to fund distributors, ETFs are managed at fees as low as 0.10-0.30%.
Indian investors will realise the importance of investing in low-cost funds as they graduate to higher and more sophisticated investment products, Mansueto said. "Expense charges will be a criterion as important as performance. Low-cost funds will become more popular in the years to come. Low-cost funds, like Vanguard, pulled the expense ratio in the US; the same will happen in India," he added.
Investor education is the best way to popularise mutual funds in India, Mansueto said. MF investments continue to be low across both retail and institutional segments. The AUM of Indian MFs as a percentage of GDP is still in singledigits compared to 76% in the US and 41% in Brazil. Household penetration of Indian funds is around 3-4%. Among households, where funds have reached, top eight cities account for 75% of retail AUM.
"Penetration will gain traction in the years to come... Fund houses will be forced to play scale; they'll be able to do it by going to smaller cities," Mansueto said. "Indian investors will stop taking direct exposure to equities in future. The need for diversification, better research, low-asset management charges will force them to invest in markets through funds," he added.
One major trend that is evolving in the fund management industry, according to Mansueto, is that investors are opting for shorter investment horizons. And this trend is not restricted to investors alone. Even fund managers are resorting to frequent portfolios churning, he said.
"In the 80s, there were funds that never turned over stocks even once in a year. Portfolio churning is gaining in proportions now - and this is where even in developed markets like the US," Mansueto said. The need to generate higher gains is prompting fund managers to rely on momentum and churn portfolios, he said. "The dependence on technical analysis over fundamental analysts reminds of what Warren Buffet said.
It's very much comparable to an astronomer who has put aside laws of physics and is now trying to find answers in astrology," Mansueto added. Morningstar also has an advisory business which recommends funds to institutions. The group is a big fan of equities and within equities smallcap companies.
"We've analysed data dating back to a century. Over a long term, stocks outperform bonds and bonds outperform cash. With equities, small-cap outperforms large companies and value outperforms growth companies," Mansueto said, adding, "There could be a tactical tilt to portfolios. But overall, we're overweight on small-cap equities," he added.
Source: http://economictimes.indiatimes.com/markets/analysis/low-cost-funds-will-become-more-popular-says-morning-star-ceo-joe-mansueto/articleshow/10575576.cms
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