SEBI reduces 0.2% extra expense in MFs following reports of misuseIn a key decision on Tuesday, the Securities and Exchange Board of India (SEBI) has reduced the additional charge of 0.20% imposed by mutual funds on Assets under Management (AUM) to just 0.05%. SEBI had previously allowed this charge to be levied over and above the maximum total expense ratio of 2.5% for equity funds and 2.25% for debt funds.

The history of the 0.2% Charge

The 0.2% charge came in after SEBI changed the way that exit loads were used by mutual funds.

An exit load is a charge levied when an investor redeems his money out of a mutual fund too soon after investing. The idea behind it is that constant inflows and outflows can disrupt a fund manager’s ability to efficiently manage a fund. The exit load deters investors from frequently investing and redeeming their money. It only applies to open-ended mutual funds because investors in close-ended funds are locked in for the duration of the fund.  

Different funds specify different periods for the imposition of exit loads. Typically it is one year for equity funds and 3-6 months for debt funds depending on the type. However, the period can vary significantly from fund to fund.

Until 2012, this amount collected from the exit load was simply added to the profit of the fund house. In September 2012, SEBI specified that this charge had to be credited back to the fund scheme in question (belonging to the investors) rather than go into the profits of the fund house. In compensation for this loss, SEBI allowed funds imposing exit load to levy a 0.20% additional charge.

However, a Mint report reveals that even funds which did not have exit loads such as close-ended funds also levied this 0.2% additional charge. The money collected from the charge also greatly exceeded the money being collected from exit load. The report cites an internal SEBI study as estimating that the 0.2% charge generated Rs 1,600-1,700 crore for mutual funds. Only about 10% of this was credited back to mutual fund schemes from exit loads, resulting in an ‘excess’ charge of about Rs 1,500 crore.

It is likely that this internal SEBI study has propelled the regulator to cut down on the additional 0.20% charge. It is unclear if the regulator will take any action to recover the amount of Rs 1,500 crore already collected by mutual funds.

Author
Neil Borate

Neil Borate is Deputy Editor, RupeeIQ. He can be contacted at neil@rupeeiq.com.