India still ranks among the most expensive countries in the world in terms of fees charged on equity and hybrid mutual funds, even after implementation of a number of investor-friendly measures in recent years.
The country's asset-weighted median expense ratio for equity mutual funds is 1.93 per cent, according to a study of by Morningstar Inc. That's higher than all 26 countries in the study except Canada, Italy and Taiwan. India's rate for hybrid funds is 1.78 per cent, more expensive than all but Germany and Canada.
Overall, India's fee and expenses grade improved to average from below average in 2017, when Morningstar conducted its last survey. The upgrade follows the nation's moves to ban up-front commissions and cap investment charges, the report said.
"While still a small fund market relative to many others in this study, India's fund industry has seen rapid growth in assets under management," Morningstar said. This growth led the country's market regulator to "require managers to pass economies of scale back to investors through lower ongoing charges."
India mutual funds' assets have tripled since 2014
Retail investors have been a force behind mutual funds' growing heft since Prime Minister Narendra Modi swept to power in 2014. Individual investor accounts have since more than doubled to 84 million, while industry assets have tripled to $370 billion, data from the Association of Mutual Funds in India show.
So why is its average cost of equity and hybrid mutual funds still among the highest in the world?
The reason is that the majority of individual investors in the country still seek the services of mutual fund distributors and opt for "commission embedded" plans which add to the cost, Morningstar said. The information provider noted that exchange-traded funds still represent a small portion of India's fund industry.
"Most Indian investors prefer active management, given active managers' relative success versus passive investments in capitalizing on inefficiencies in the developing Indian investment markets," the report said.
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