Change in MF fee structures: Investors to get exit option

The move would give unit holders the option to choose whether they want to stay invested in schemes once the method of computation of total expenses is changed.
"Fund-of-fund schemes existing as on July 29 shall with the approval of trustees adopt either of the total expense structures laid out... and change the total expense structure after giving the unit holders an option to exit," Sebi said in a circular.

On July 29, the market regulator had notified changes to the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, by notifying the Sebi (Mutual Funds) (Amendment) Regulation, 2010.

It had issued revised regulations to the fund houses for prescribing changes in the calculation of total expenses charged by them from investors. The expense fee charged by MF houses from investors include redemption expenses, investment management and advisory fees, among others.

Sebi had said that the total expense, including management fees, charged from investors in a fund-of-fund scheme should not exceed 0.75 per cent of either the daily or weekly average net assets. In a fund-of-fund scheme, a mutual fund usually invests in a scheme of another MF.

Alternatively, the fund houses should cap the management expenses at 0.75 per cent and fix their own fee for administrative expenses, provided the total charge does not exceed 2.5 per cent of the daily or weekly average net assets.

In the case of an index fund scheme or exchange traded fund, the total fee charged from an investor, including the investment and advisory expenses, should not exceed 1.5 per cent of the weekly average net assets.

Currently, MFs charge investors a flat fee of 2.25 per cent on the average of daily or weekly net assets.

The fund houses have come under Sebi's scanner for allegedly giving their agents and distributors lavish incentives like cash payouts and foreign junkets in return for higher sales. They choose to include this expenditure under the head of management expense, thereby charging investors for the same.

Instances of distributors of various fund houses being showered with cash incentives and trips to exotic locations in India and abroad have come to light since the practice of charging an entry-load from investors was scrapped last year.

MF distributors are said to be have been in disarray ever since the fund houses were barred by Sebi from charging any entry-load from investors. Entry load is the commission that an investor has to pay while purchasing units of a mutual fund.