Indian funds are the cheapest and cleanest in the world

A fund will have three kinds of costs—entry, ongoing and exit. By banning entry loads, India has collapsed all costs into the annual cost and the exit load

Now that the dust has settled over last week’s announcements by the Securities and Exchange Board of India (Sebi) and the merits or otherwise of the hike in mutual fund costs have been chewed over, two issues have emerged that still need a comment. One, that Indian funds are the most expensive in the world. Two, that the changes are pro-big fund houses.

The 50 basis point (bps) hike (30 bps for non-metro penetration and 20 bps to take care of the exit load clawback getting ploughed back into the scheme) in expense ratios will bring the entry level cost of an equity fund to 3% a year. Funds are allowed to charge expense ratios on a sliding scale. The first Rs.100 crore of assets under management will now be charged 3% (2.5% earlier), the next Rs.300 crore 2.75%, the next Rs.300 crore 2.5% and all assets after Rs.700 crore will be charged 2.25%. If the average cost was 2% earlier, it will now be 2.5%. Let’s look at what the rest of the world charges: the median annual recurring cost in the US is 0.94%, in UK 1.67%, China 1.3% and South Africa 1.47%. Remember, we’re talking about managed funds and not passive index huggers. At 2.5% annual cost, India is indeed the most expensive. But that is only half the truth; to see the total impact of cost, we need to build in all other costs as well. A fund will have three kinds of costs—entry, ongoing and exit. By banning entry loads, India has collapsed all costs into the annual cost and the exit load. If we build in the 1% exit load on money that leaves an equity fund before 365 days, we get a total cost of 3.5%. Now look at what the US and UK charge. The US, with its three share classes, has costs that range from 1.18% to 7.1%. The UK funds cost an average of 6.67% a year.

Not only are Indian funds the cheapest, they are also the most transparent. Costs in other markets such as the UK and US are not so easy to define. The US, with its various share classes and cost sub-categories, is almost impossible to navigate for an average investor. The UK too seems not to define costs as well. Says financial planner Nick Cann, chief executive of the UK-based Institute of Financial Planning: “The annual management charge on mutual funds in UK varies quite a lot. There’s no set minimum and maximum, 1.5% per annum is pretty typical although 0.5% of that is usually paid away to the adviser (if there is one). Some charge more (specialist funds usually go upto about 2%), others charge less although few go below 1% per annum.” Maybe it’s time we stop beating ourselves up and look at mutual funds as the lowest cost, transparent vehicle for a variety of retail investment needs.

The second crib is around the smaller asset management companies (AMCs) getting short-changed by linking the hike in expense ratios to gathering non-metro business and for the exit load clawback rise in expense ratios. The argument is that this will benefit the larger fund houses. Two points here. One, smaller AMCs are represented on the mutual fund committee and need to use that forum to put their voices across. Two, when a business is started there are no guarantees getting handed out. What prevents a new AMC from coming in with a business plan that looks at focusing on a non-metro region rather than trying to replicate the high-cost 15-metro-heavy existing business model of the large AMCs? The mutual fund industry is more than 20 years old and those that have been there for those many years will have an advantage over the newcomers. I don’t understand why the regulator should give sops to the newbies to make their business profitable.

End note: Out of all the debate, there may emerge some things that may need a tweak. One example is the exit load calculation. The way the numbers are done right now, it seems that the fund houses’ benefit will be a multiplier to that of the investors. Exit load calculations need to be seen on incremental assets gathered by the fund and not on to the total corpus. An update a year later will also help in mapping out how this change has impacted the industry and the investor. Since we know what we are trying to map, possibly the data collection could happen on an ongoing basis rather than defining the data metrics a year later.

Source: http://www.livemint.com/2012/08/21213341/Indian-funds-are-the-cheapest.html

Small town financial advisors not enthused by Sebi's moves

Independent Financial Advisors seek higher trail commissions, mutual fund executives agree.

Independent Financial Advisors (IFAs), a strong link between asset management companies (AMCs) and potential investors, especially in the smaller cities of the country, are not excited with the tweaks made by the capital markets regulator, Securities and Exchange Board of India (Sebi) last week to increase penetration of mutual fund products. Rather, they termed the steps as a “drop in the ocean”.

In its quick check with small IFAs spread across the country, Business Standard, found out that majority of financial advisors have lost a significant chunk of their revenues from selling mutual funds. Though frustrated, they said they wanted a clear and concrete road-map for the industry.

Sanjeev Sharma, an Indore-based IFA, says, “Amfi aur Sebi ko cheezein clear rakhni chaahiye. Jab aap kuchh change karo to hamein samay lagta hai adjust karne mein. Ek saal beeta nahi ki fir se parivartan ho jata hai, jo sahi nahi hai (Amfi and Sebi should keep things clear. It takes time to adjust in a new business model, but rules get tweaked in a year which is not good).”

The sentiment is reflected by a Patna-based advisor Manu Mehrotra, who says, "I have upgraded my office and invested in technology to service my clients but people are used to free financial advice which is not helping us. By increasing 30 bps (basis points) in expense ratio, it's not going to increase penetration of mutual fund products." He adds that investors must pay as advisors need to be remunerated for their services.

Last week, Sebi allowed AMCs to charge an extra 30 bps as expense ratio provided the new fund flows from beyond the top 15 cities make up 30 per cent of the overall assets.

Though none of the AMCs have yet called upon IFAs about how they plan to take things further, the latter said they would prefer increment in their trail-commissions rather than a rise in upfront commissions.

Bikaner-based Suresh Modi, who lost more than 80 per cent of his mutual fund business over the last few years, says, "I get 5-10 basis points (bps) as upfront commission. But my trail commission is around 50 basis points. It would be better if AMCs increase the trail to 80 bps." Other advisors echo Modi's opinion. Moreover, they say that if trail goes up they would like to retain clients for a longer period of time, which will be good for all stakeholders.

Currently, on an average, upfront commissions to IFAs range between 10 bps to 50 bps (though in some cases it is as high as 1.5 per cent) while the trail stands in the range of 30 bps to 80 bps.

The demand by IFAs for higher trail has also found takers in the industry. Chief executives say they will be in a better position to take a call on the same once Sebi brings out the fineprint of the measures announced last week.

Sanjay Sachdev, chief executive officer (CEO) of Tata Mutual Fund, says, "I am in favour of higher trail-commission. Though, as of now, I cannot make any commitment till things get clear." Agrees Akshay Gupta, CEO of Peerless MF.

According to Dhirendra Kumar, chief executive of Delhi-based mutual fund tracking firm Value Research, "Higher trail-commission is quite a legitimate demand from IFAs. It will help retain funds for longer period. I believe, distributors should not only get higher trailing commissions on the new flows but also on the existing fund mobilisation."

Indore's Sharma, rightly points out, "We will keep trying to adjust with new norms and service our clients for longer-term if trail goes up."

Source: http://www.business-standard.com/india/news/small-town-financial-advisors-not-enthused-by-sebis-moves/483966/