CAPITAL market regulator the Sebi is considering a proposal under which fund management fees charged by mutual funds will be linked to the performance of a scheme. Currently, fund houses can charge a maximum of 1.75% as money management fee for equity schemes, irrespective of how the schemes fare. Investor bodies have been complaining to Sebi for some time that the existing fee structure encourages mutual funds to maximise their as-sets under management, rather than focus on delivering superior re-turns.
The proposal for returns-linked management fee was discussed at a meeting with investor associations last week, a person present at the meeting told ET. "For investors, to pay the maximum amount in a scheme, which is consistently underperforming in relation to its benchmark is unreasonable and part of the burden should be shared by the mutual fund," said an internal discussion paper.
The regulatory group looking into the matter has proposed that for equity schemes underperforming within 5% of their benchmarks, the existing fee structure can be continued. For schemes underperforming over 5% of their benchmarks, a graded system of decreasing the fee should be considered, after factoring in the number of years the scheme has been in existence.
Understandably, mutual funds are not too excited about the proposal. Conceptually, it is a good proposal. However, one has to consider the practical aspects too.
A mutual fund official believes that if management fee is linked to performance, fund managers may take higher risk to deliver the returns. Also, it is market forces that should determine which fund house an investor puts money in. If the performance is good, investors will automatically flock to that fund house, adding that the move may also result in mutual funds becoming quasiportfolio management service, where the fee is paid based on the performance.
MFs have been struggling to attract money into their equity schemes since August 2009, when Sebi banned mutual funds from charging investors to pay fees to distributors. Following this move, distributors are selling fewer mutual fund schemes. The industry lost around 5%, or 18 lakh equity folios, in the first half of this fiscal.
