SEBI is proposing uniform TER in an attempt to enhance transparency to the cost charged to the unit holders. Now, you must have seen the proposal, we all have, it is a 40-page proposal. How are you reading it? What is the sense that you are making out of it? Also, tell us from an investor’s point of view, what do these proposals mean and what is the existing pattern of what has been proposed?
Honestly speaking, we are also going through the numbers. We are still trying to see how it will impact. Of course, SEBI has come out with its paper on the basis of some discussion they would have internally. They have definitely shared with the industry also.
We are working on it. We will respond to the consultation paper. And I am sure looking at all angles from this thing, from the investor point of view, from the industry point of view, from the intermediary point of view and more than anything else keeping in view the growth of the industry, I think the final whatever will come will be for the benefit of everybody.
While saying so, I think there is a lot of growth capital which still this industry needs because we have not yet scratched the surface. When we look in the percentage terms, of course, it looks like that we have grown very well. Of course, I cannot deny that, we have grown very well, but the opportunity and the potential is much-much larger and we need to reach out to many-many more nooks and corners of the country for which the intermediation is required and see a proper, economically viable remuneration structure is definitely required for the growth of any industry. I think we will be putting forward our views and we will see how it is impacting overall and a rational decision will finally be there. I am very sure about that.
Looking at the current structure of these proposals made, what could be an intermittent challenge for an AMC like you?
We are not capital intensive industry, we do not need much capital, that is very much there. Profitability less or more is a secondary point. Mostly what I am looking from the penetration point of view, the growth of industry point of view and see what happens here, the structure which is being proposed, it is differentiating between the larger AMCs and the smaller AMCs, that is something which we have to understand because the responsibilities and accountabilities of the major, bigger AMCs are also different from the smaller AMCs and smaller AMCs are doing a pretty good job in giving solutions to the industry.
In fact, if you look at the existing structure also, the larger the scheme size, lower is the expense ratio, which is already there and during the last five years since 2018, the expense ratio, the average expense ratios at the industry level has come down by 40 basis point and we have schemes, the larger scheme, where the expense ratios have come down as high as 50 to 60 basis point also over the period of five years, so that system is very well inbuilt in the system.
But going forward, what the structure is being proposed is at the overall AUM level. Of course, I think that there are some different ways of looking at it and we will put forward our point of view and I am sure that that will be considered. Break down the current structure and when SEBI says that TER must include brokerage expenses too, so far what is the breakup and were investors actually being made doubly charged? What could be the impact of this on the fund house if this proposal gets through?
That is fine actually that they have a reason to say that and today when they allowed extra charges, the point of SEBI is that it should be totally transparent, and I think that nobody can deny that and people should be aware that how much expenses are actually being charged.
When we are showing something and actually charging little more so there is no denial on the fact that when we are at the highest level of transparency, there should be nothing which is hidden, so that is absolutely fine, that that can be taken care of.
In any case, this 12 basis point which is being talked about is the maximum limit and I cannot say for everybody, I cannot vouch for everybody, but I think majority of the fund houses, average expenses which are being charged are 3 to 4 basis points or 5 basis points that is it. So that is how it is being charged. And if that is being brought in in the total expense ratio, that is fine.
How is SEBI asking the AMCs to use the Investor Education Fund? What is being proposed on those lines?
You see, they are saying that the B30 incentive which is being paid when we were charging extra to the scheme, rather than charging extra it should be paid out of the Investor Education Fund which of course when this started, we were charging 2 basis points. At that time industry was 8 lakh crores and today the industry is 40 lakh crores. And with the kind of this thing coming to the new investors only, I think this should be good enough and that is not a big issue.
One very interesting proposal is performance-based TER. SEBI has proposed performance-based TER. How are you looking at it? It is a widely adopted concept in the west, but then do you think this can actually work and if the fund is not performing, you do not need to pay that extra money to the fund manager. How are you looking at it?
This is being proposed as one of the categories. There is no issue. This is something between the normal active fund and PMS. PMS, generally, this is there, the performance fees, etc. One category is good enough. If there is one fund, which is charging on the basis of the performance only, but only issue is then how it will be implemented because in equity funds I cannot say that one year is the unit because generally we advocate that we are very bullish on a particular stock and we pick up in our portfolio, that stock may see the traction in the market during the first year itself or it may take one or two years.
So, it is very difficult to put a unit. I mean, year as a unit or quarter as a unit or three years as a unit, so that is something which we will have to see. We will respond to that, seek the guidance and we will see how it is to be implemented.
Now, in the implementation, the question is when does an investor actually get charged because a fund will have a cycle of performance and there will be times when the fund can perform, there will be time when the fund must have underperformed. Any guidelines on those lines mentioned in the proposal?
Not really in the proposal, that is what I am saying, we will have to debate on that. We will have to interact and understand how it is to be calculated, that is a separate thing to be discussed.
But I personally feel that this is consultation paper. I am very sure if we are able to put forward a point backed by the proper data and the condition, so as on date I am not very worried and as an industry we can handle this, but there are some concerns which we will definitely take and discuss with the SEBI over the period of time.
Just looking at the consultation paper, did you do any number crunching because this seems to come as a shock for the industry of almost Rs 1400 crore. How do you see this impacting your AMC? Did you do some maths? Anything that you can talk about on those lines?
So, we are in the process of looking at it. Over the period of time, volumes will also make up for it. We cannot say this is going to remain the business. Business will grow. In percentage terms, we may lose. But in the absolute terms, we may grow. These things have happened earlier also. But as I said, I am not looking at the number as of now because I see a lot of things which we can discuss and honestly speaking SEBI is listening, SEBI is consulting and they will definitely discuss and they will get convinced and they will convince that is the point.
Could you also explain the proposals made on the NFO collections?
I think that is the story of the past and if you look at today, NFOs in any case, most of the fund houses have exhausted all the categories. Maybe one or two more categories come and moreover, the kind of regulations which are there on the distribution of fee, etc, we have seen the worst and I think we are beyond that, so nothing, no abuse can be done as of now.
How do you see TER getting uniform for equity and debt? What is the TER now for equity and debt if you could just tell us the breakup?
Today, the equity funds, every category of funds, there is a graded structure which is up to Rs 500 crore rupees, a particular amount. And as you keep on going, just to give you an example, one of the funds which we have, seven years ago and five years ago when we had 2018, we were charging on that around 2.10% as the TER and with the growth of size today that fund is charging 1.35% because of the size going up, so it has already happened and the benefit of that, the low charges have already been passed on to the investor.
But going forward, with uniform, I mean, if the overall structure comes down, there will be some funds, very big funds, where it can move up because one good thing which has been done because there is a GST issue also, which has not been discussed because they have increased the maximum to 2.55 from the existing 2.25. So going by that, some things will be taken care of and, of course, whenever there is a hit, it has to be passed on partially to the distributors also. But my issue is the new distributors are not coming into the market. If they do not have a viable, economically viable business point, then they will not enter and mutual funds being B2B, where we have yet to reach even a percentage of what the advanced economies are, I think there will be an issue because growth capital will become scarce and it will be difficult to reach out to many-many more nooks and corners of the country, so that is something which is my concern, but I will have to see the numbers to really make up my mind on this.
SEBI is also giving a lot of thrust to curb misselling and to ensure there is transparency. Overall, looking at these proposals, do you think it is actually serving that kind of a purpose and obviously all stakeholders are needed in this particular thing but then do we really expect this particular sector to go more transparent or you think that it will just complicate it further?
I think we are transparent enough. As far as misselling is concerned, there cannot be any two views, the misselling has to be dealt with very-very severely wherever it happens and over the period of time, I will say that the distributor community which is being charged with the misselling, over the period of time a lot of discipline has come into this.
So, even they are behaving in a very responsible manner and this is a evolving situation and already even for the misselling the AMCs must be taking all the action. What happens sometimes, distributors versus the investors also there are some issues which we come to know later on. So, we have to see overall how the interest of investors is taken care of. And I think regulators, AMCs, everybody is having a simple, single view that there can be zero tolerance on the misselling. We cannot afford to do that. But only advantage to the mutual fund industry is that everybody is putting money in liquidation. So, one can withdraw at any point of time, but that is not a point that you should have misselling but the misselling and other instruments like insurance where the money is locked in has far-reaching consequences than the mutual fund misselling, but while saying so I am not at all suggesting that even if some misselling there it is acceptable, not at all, zero tolerance.
The proposal also focusses on women investor education and women participation. How is it laid down there?
Very-very interesting which SEBI has come up because this is one of the very progressive steps, from the Investor Education Fund. New women investors are brought in, then there is an extra distribution cost which is to be given. I think we will welcome that and we are very happy to do that in our businesses.
