SEBI Seeks To Boost Returns With New Performance-Linked Fees For Mutual Funds

SEBI plans to introduce a new category of mutual fund schemes where asset managers’ charges will partly be linked to performance.

What Happened? According to a Reuters report, the proposal would allow additional charges if a fund consistently outperforms a relevant benchmark index and delivers higher annualised returns.

If introduced, the proposal would reduce the base fees currently charged for mutual funds and base additional charges on performance.

According to another source quoted by Reuters, the regulator is considering this proposal since it has observed that many actively managed funds fail to beat their benchmark index. An option for additional charges could act as an incentive for funds to give better returns, the source said.

The regulator will use past performance to judge whether a fund has performed better than the chosen benchmark.

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Why it matters? Indian asset management companies can currently charge a Total Expense Ratio, which ranges from 0-2.25% of the investment amount. The fee includes the total costs associated with managing the fund.

To get more investors to invest in mutual fund schemes from India’s tier-2 and tier-3 cities, the regulator also allows fund houses to charge additional fees for marketing and to incentivise intermediaries.

However, during inspections of India’s 44 asset managers, SEBI found instances of malpractice, including incentive charges on the same investor by different funds. To curb this, the document showed that SEBI will only allow funds to charge additional fees if an investor is buying any mutual fund for the first time. The report mentions that SEBI has referred the proposal to its mutual fund panel to work out implementation.

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