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MF Changes: Silver Lining If Not a Silver Bullet!

Published on Sat, Aug 18,2012 | 11:12, Updated at Thu, Aug 30 at 16:23Source : 

By: Nehal Sampat, Associate Director, PwC India

The MF industry related proposals announced by the SEBI yesterday reminds one of the recent television advertisement of a leading telecom company seeking to “delight its customers”. The changes proposed by the SEBI, literally, have some ‘delights’ for all the stakeholders of the MF industry – the investors, the distributors and the AMCs. This article seeks to analyse some of the key changes and their potential impact on the MF industry and its stakeholders.

For the MF investors

  • From the AMC’s perspective, the cost of ‘procurement’ (for want of a better word) is different for direct investors as compared to investors sourced through other distribution channels. To promote direct investment and to pass on the benefit of lower ‘procurement’ cost to the investor, the SEBI has mooted the idea of different plans for direct investors in a mutual scheme with lower expense ratio.
  • The need for investor education and financial literacy in a developing and diversified country like ours has been well recognised. AMCs will now need to set aside a part of their fees for investor education initiatives. Once these funds are well-spent, in the long run, both the investors and the MF industry will benefit.
  • Certain other investor-friendly moves have been proposed:

- Investors, who may not have bank accounts, can conduct cash transactions up to Rs 20,000 subject to certain compliances under the Prevention of Money Laundering Act, 2002. This will benefit small investors who may find it more convenient to invest through cash ‘deposits’.

- A system of identification of sales personnel of distributors and ‘product labelling’ is proposed to be evolved. While further details our awaited, this is expected to curb mis-selling.

- Exit loads collected from investors who divest their investment within  a year, which hitherto were collected by the AMCs, will now be contributed to the Scheme. The AMCs can additionally charge up to 20 basis points from the Scheme. However, this change is not expected to enhance cost of the investors.

- Investment advisors and financial planners would now be governed by the Investment Advisors Regulations which were approved by the SEBI. This would assist in protection of investors.

- Additional disclosures by the AMCs around half-yearly results of mutual funds, net inflows, AUM, etc.

  • Some changes like recovery of service-tax (which have been discussed below) are likely to increase the cost of investing in mutual funds. Although they may, at first blush, seem adverse from investors’ perspective, they would, in the long run, facilitate additional investments in the MF industry and contribute to sustainable growth.

For the distributors

  • Additional incentives are proposed to be placed at the disposal of AMCs to extend the reach of the mutual fund industry beyond the top 15 cities. AMCs will now have the ability to additionally charge up to 30 bps based on new inflows from such other smaller cities/towns. This should ultimately lead to incentivising of distributors and thus, better penetration for the MF industry. This methodology of recovering additional expenses is indeed innovative and could lead the industry in that direction that the Regulator wants it to pursue.
  • Within the aggregate expense ratio limits, there are sub-limits on different categories of expenses that can be charged to a scheme. Some of these limits tend not to be utilised for various reasons. Fungibility of “total expense ratio” is now proposed. This provides additional flexibility to AMCs which, in turn, is expected to result in more funds being available for distribution.
  • Certain other distributor-friendly moves have been proposed:

- The distributors’ registration process is proposed to be simplified, especially for distributors selling simple products. Different levels of certification and registration would be required depending upon products and services offered.

- The distributor base is proposed to be widened to now include postal agents, retired officials from banks, government, teaching fraternity, etc.

- A self-regulatory organisation is proposed to be set-up in near future to regulate distributors.

For the AMCs

  • Services rendered by AMCs to the mutual fund are liable to service-tax. Service-tax was included in the expense ratio that the AMCs could recover from the Schemes. The expense ratio was envisaged for recovery of, amongst others, costs incurred by AMCs in management of funds. The inclusion of the levy of service-tax, which was introduced subsequently, effectively limited the amount available for the AMCs. Removal of service-tax from the expense ratio is, therefore, a logical move. Recovery of service-tax may increase the cost of investing in mutual funds by 15 to 20 bps.
  • Marginal increases in expenses ratios and fungibility thereof, as discussed above, are likely to have a positive effect on AMCs.
  • Recommending mutual fund investments as a part of Rajiv Gandhi Equity Savings Scheme could assist AMCs in attracting new investors in capital markets.
  • The decision of the Regulator to evolve a comprehensive policy in the long-term to address all aspects including tax issues, financial inclusion, etc. could pave the way for more reforms, which could attract more investments.


There could be some operational challenges for the AMCs in implementing some of the above changes; however they may not be insurmountable. Though one awaits the fine print of the amendments, for an industry facing strong headwinds, the announcements from the SEBI are certainly positive. The announcements reflect an earnest effort on the part of the Regulator to address some of the challenges faced by the MF industry. While there may not be a ‘silver bullet’, there is certainly a ‘silver lining’. If other macro-economic factors and capital market sentiments improve, the tide can turn for the MF industry.


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