Will your mutual funds be able to charge performance-linked fees?

Mutual fund circles are talking about performance-linked fees after the Securities and Exchange Board of India or Sebi put out a Consultation Paper on the Review of Total Expense Ratio charged by Asset Management Companies (AMCs) to unitholders of schemes of Mutual Funds. The market regulator said the move is aimed to facilitate greater transparency and accrual of benefits of economies of scale to investors. The market watchdog wanted to cap the Total Expense Ratio charged by mutual funds as the total costs incurred by investors were way above the prescribed fee. The Sebi also proposed a performance-linked fee. Will it make a big difference to mutual fund investors? ETMutualfunds looked at the performance of the top 10 mutual fund houses based on the assets managed and looked at the data on actively-managed equity schemes to see how many schemes managed to outperform their benchmarks in the five-year horizon to justify performance-linked fees. We looked at the five-year period as Sebi introduced the total returns-based benchmarks five years ago. Surprisingly, most schemes failed in this task.

SBI Mutual Fund: The fund house manages the largest AUM of around Rs 7.45 lakh crore. The fund house has around 19 equity-oriented schemes. Out of 19 equity-oriented schemes, 9 schemes outperformed their respective benchmarks. Only around 47% of the schemes from this fund house have managed to outperform their respective benchmarks. The schemes that managed to outperform were SBI Consumption Opportunities Fund, SBI Equity Hybrid Fund, SBI Flexi Cap Fund, SBI Focused Equity Fund, SBI Healthcare Opportunities Fund, SBI Infrastructure Fund, SBI Magnum Comma Fund, SBI Small Cap Fund, SBI Technology Opportunities Fund.

ICICI Prudential Mutual Fund: The fund house manages an AUM of around 5.41 lakh crore. The fund house manages 17 equity-oriented schemes. Out of 17 schemes, only 5 schemes managed to beat their benchmarks. In other words, only around 29% of the schemes managed to beat their respective benchmarks. The schemes that outperformed their respective benchmarks included ICICI Prudential Equity & Debt Fund, ICICI Prudential FMCG Fund, ICICI Prudential Small Cap Fund, ICICI Prudential Technology Fund, ICICI Prudential US Bluechip Equity Fund.

HDFC Mutual Fund: HDFC Mutual Fund manages an AUM of Rs 4.74 lakh crore. The fund house has 13 equity-oriented schemes. We considered only 12 schemes as the benchmark data for one scheme was not available for comparison. Out of 12 schemes, only one scheme has managed to outperform its benchmark. This shows the percentage of outperformance was very low at 8%. The scheme that outperformed its benchmark was HDFC Small Cap Fund.

Nippon India Mutual Fund: The fund house manages an AUM of around 3.04 lakh crore. The fund house has around 18 equity-oriented schemes. Out of 18 schemes, five schemes managed to beat their respective benchmarks. That means, only 28% schemes managed to beat their respective benchmarks. The schemes that outperformed their benchmarks were Nippon India Focused Equity Fund, Nippon India Pharma Fund, Nippon India Power & Infra Fund, Nippon India Small Cap Fund, and Nippon India US Equity Opportunities Fund.

Kotak Mutual Fund: The fund house manages an AUM of around Rs 2.98 lakh crore. The fund house has around 10 equity-oriented schemes. Out of 10 schemes, six schemes have managed to beat their respective benchmarks. That is, 60% schemes have outperformed their respective benchmarks. The schemes that outperformed their respective benchmarks include Kotak Emerging Equity Fund, Kotak Flexicap Fund, Kotak India EQ Contra Fund, Kotak Infra & Eco Reform Fund, Kotak Small Cap Fund, and Kotak Tax Saver Fund.

Aditya Birla Sun Life Mutual Fund: The fund house manages an AUM of Rs 2.86 lakh crore. The fund house has around 20 equity-oriented schemes. Out of 20 schemes, only five schemes managed to outperform their benchmarks. Around 25% schemes outperform their benchmarks. The schemes that outperformed their respective benchmarks were Aditya Birla Sun Life Digital India Fund, Aditya Birla Sun Life Flexi Cap Fund, Aditya Birla Sun Life India GenNext Fund, Aditya Birla Sun Life Infrastructure Fund, and Aditya Birla Sun Life Small Cap Fund.Axis Mutual Fund: Axis Mutual Fund manages an AUM of Rs 2.43 lakh crore. The fund house has around eight equity-oriented schemes. We considered only seven schemes as the benchmark data for one scheme was not available for comparison. Out of seven schemes, five schemes outperformed their respective benchmarks. Around 71% schemes managed to beat their benchmarks. The schemes that managed to outperform their benchmarks include Axis Bluechip Fund, Axis Focused 25 Fund, Axis Long Term Equity Fund, Axis Midcap Fund, and Axis Small Cap Fund.

UTI Mutual Fund: The fund house manages an AUM of Rs 2.41 lakh crore. The fund house has around 14 equity-oriented schemes. Out of 14 schemes, only three schemes managed to beat their respective benchmarks. Around 21% schemes managed to outperform their respective benchmarks. The schemes that managed to outperform their respective benchmarks include UTI Flexi Cap Fund, UTI Healthcare Fund, and UTI Infrastructure Fund.

Edelweiss Mutual Fund: The fund house manages an AUM of Rs 1.24 lakh crore. The fund house has around nine equity-oriented schemes. Out of nine schemes, no scheme managed to outperform their respective benchmarks. Only one scheme Edelweiss Mid Cap Fund offered similar returns as offered by its benchmark. The scheme offered 14.87% returns.

Mirae Asset Mutual Fund: The fund house manages an AUM of Rs 1.21 lakh crore. The fund house has around five equity-oriented schemes. All five schemes managed to outperform their respective benchmarks. The percentage of outperformance by the fund house was 100%. The schemes that outperformed their respective benchmarks include Mirae Asset Emerging Bluechip Fund, Mirae Asset Great Consumer Fund, Mirae Asset Hybrid Equity Fund, Mirae Asset Large Cap Fund, and Mirae Asset Tax Saver Fund

We considered daily rolling returns for the study. The daily rolling returns were calculated for the period starting from May 22, 2018 to May 22, 2023. For the study, we considered all equity-oriented schemes such as large cap, mid cap, small cap, flexi cap, focused fund, multi cap fund, large & mid cap fund, contra/value fund, sectoral/thematic, aggressive hybrid, balanced advantage/dynamic asset allocation, and equity savings.

To sum up, only a few fund houses may be able to charge a performance-linked fee. We looked at the performance of 133 equity schemes from the top 10 mutual funds for the study. Only 44 schemes or 33% outperformed their respective benchmarks. For example, Mirae Asset Mutual Fund with its 100% outperformance stands to gain. As you can see, only some fund houses managed to beat their benchmarks to charge performance-linked fees.