Performance Incentive Could Be Part Of New SEBI Expense Guidelines For Mutual Funds

The Securities and Exchange Board of India is contemplating a proposal to allow a performance incentive for mutual fund schemes, as part of its promised overhaul of the expenses structure of mutual fund schemes.

Currently, a working group of the regulator is engaged in firming up the contours of the new expenses structure, which is currently illustrated as the total expense ratio or TER.

This ratio, a percentage of the net asset value of a scheme, includes various costs borne by the asset management company, such as the cost of hiring fund managers and distribution costs.

As part of the process, which involves consultation with industry participants, a proposal to include a performance incentive for mutual fund schemes was received and is being considered, said Ananda Barua, wholetime member of SEBI, at the CII Mutual Fund Summit in Mumbai.

The exact nature of the outperformance and the extent of the incentive is not known, since the inclusion of the incentive is yet to be finalised, according to a person aware of the development, who spoke with BQ Prime on the condition of anonymity.

However, as an illustration, if a mutual fund scheme were to outperform the benchmark index, it is possible that the asset management company will enjoy a share of the excess return.

Chairperson Madhabi Puri Buch had confirmed that an overhaul of the TER was in the works, at the press conference that followed the SEBI board meeting at the end of March.

Currently, the TER is decided at a scheme level and it reduces as the assets under management of the scheme rise beyond predetermined thresholds.

It is likely that the markets regulator will do away with this scheme-level classification of expenses and adopt an asset class-level expense ratio. As such, all schemes within an asset class will likely have a common expense ratio, according to another person with knowledge of the matter, who spoke on condition of anonymity.

Here, asset classes would be defined as equity and fixed income, but a further classification based on active and passive fund management is likely, the person quoted above said.

Here, too, the expense ratio is expected to reduce as assets under management rise beyond predetermined thresholds.

Once the final details have been decided on, the market regulator is expected to issue a consultation paper, which would invite comments from stakeholders. This paper could be issued within the next three months, the person quoted above said.