Make MF schemes more affordable

The Securities and Exchange Board India (Sebi) is considering a uniform expense ratio for mutual fund (MF) scheme categories such as equity and debt to curb mis-selling and lower entry costs for investors. A large chunk of investments in new schemes that typically have higher expense ratios is being pulled out of existing schemes. Sebi also finds scope for total expense ratios to decline as more household savings are routed to securities through MFs. Diversity in expense ratios fund houses charge based on factors such as the assets under management in individual schemes creates a perverse incentive to corral existing as well as new investments in costly newer, and hence smaller, schemes. This creates an avoidable entry barrier in the industry that Sebi is trying to lower as part of continuous efforts towards financial inclusion.

Simplification of the fee structure is the latest in a series of decisions by the regulator to improve investor choice. Sebi has earlier pushed for reducing the number of schemes – another tactic to steer investments towards high intermediation costs. It has sought mergers of overlapping schemes and raised the bar on differentiation for new ones. Definitional clarity has improved over investment themes such as based on market capitalisation and asset allocation. Styles of fund managers like value or growth investing have also received taxonomic clarity. All of this is designed to provide investors uncoerced choice over their investments.

Assets managed by Indian MFs have grown five times in 10 years, and have doubled in the last five. Sebi is right in voicing concern that intermediation fees have not dropped in relation to the surge in funds flowing into the MF industry. The industry now offers a wide channel for reducing Indian households’ traditional preference for saving in relatively low-yielding physical assets. More gains await as MF penetration improves in tier-2 towns and beyond. Regulatory changes to improve investor access to securities will widen wealth creation.