BUSINESS

SEBI to review MF expense ratio limits

Key roles:SEBI Chairman Ajay Tyagi flanked by AMFI’sA. Balasubramanian, left, and HDFC’s Parekh.Paul Noronha

Key roles:SEBI Chairman Ajay Tyagi flanked by AMFI’sA. Balasubramanian, left, and HDFC’s Parekh.Paul Noronha  

Tyagi stresses need to revisit norms amid concerns over concentration of profits among fund houses

The Securities and Exchange Board of India (SEBI) might soon review the expense ratio limits for mutual funds to address the concerns related to concentration of profits among a few large fund houses.

Hinting that the regulator might soon take a re-look at the norms, SEBI chairman Ajay Tyagi said that a review was required to encourage healthy competition within the industry.

“You would appreciate that from an overall industry perspective, some thinking is definitely required to bring in elements that facilitate a healthy competition in the industry,” Mr. Tyagi said while speaking at an event organised by the Association of Mutual Funds in India (AMFI).

The SEBI chief made the statement in the context of the fact that the revenue of the seven large fund houses is more than 60% of the total industry revenue, while the profit margin of large mutual funds was in the range of 40-50%. Expense ratio, which broadly ranges between 0.75% to 2.5%, is the fee that fund houses charge investors to manage all the expenses of the fund house.

“It is apparent, therefore, that large AMCs have a fairly high market share of the total AUM, revenues and profits for the industry as a whole, indicating a high concentration of the industry in a few hands. Is this concentration due to lack of adequate competition in the fund space? Are such disproportionately high profits due to high Total Expense Ratio (TERs), especially in equity funds?,” Mr. Tyagi said.

The SEBI chairman also said that fund houses should maintain an arm’s length relationship with respect to related party investments to avoid any conflict of interest.

“Some recent cases, the details of which I need not get into, do not augur well with the public service character of the industry and have to be avoided at all costs. An arm’s length relationship with respect to related party investments as also avoiding conflict of interest is the need of the hour,” he said.

Recently, there were reports that the capital market watchdog had directed ICICI Prudential Mutual Fund to return the money to its schemes that invested in the public issue of ICICI Securities.

AUM growth

Lauding the performance of the mutual fund industry, the SEBI chief highlighted the fact that the AUM has grown over two times in the last five years to touch Rs. 23 trillion in June.

“The customer base of mutual funds is also growing at a healthy rate with nearly 7.59 crore folios in July 2018, as against 5.99 crore folios in July 2017 – an increase of around 27% over one year,” he said.

Recommended for you