Merger of MF schemes will bring down investor costs

The new SEBI norms streamlining the plethora of mutual fund schemes under five distinct heads — equity, debt, hybrid, solution-oriented and others — will lead to a merger of schemes and bring down costs for investors.

The new regulations will also lead to churning of the portfolios by MFs over the next six months as they segregate investments to align schemes according to the SEBI parameters.

Aashish Somaiyaa, MD & CEO, Motilal Oswal AMC, said the biggest beneficiary in the merger of schemes would be investors as there would be a consolidation of assets and a lower total expense ratio.

Going by the new SEBI norms, there are not even 10 pure-play large-cap funds in the market as every large-cap fund currently has about 30-50 per cent exposure in mid-cap stocks, he said.

Currently, the expense ratio is charged in slabs, with Assets Under Management of ₹100 crore attracting 2.5 per cent, with a reduction of 0.25 percentage points for the next ₹300 crore, and a further reduction of 0.25 percentage points for the next ₹300 crore. Thereafter a charge of 1.75 per cent is applicable.

For debt funds, the expense ratio allowed is 0.25 percentage points lower than equity funds.

Consolidation of schemes will also help SEBI bring down the expense ratio. The total expense ratio in most countries is between 1 per cent and 1.7 per cent, with India and Canada being the most expensive at over 2 per cent.

In order to ensure uniformity in the investment universe for equity schemes, SEBI has defined large cap as the top 100 companies in terms of full market capitalisation, and the next 150 companies in market capitalisation as mid-caps. The remaining companies will be considered as small-cap stocks.

SEBI has directed the Association of Mutual Fund of India, an industry body, to prepare the list of stocks according to its parameters and ensure that MFs follow the investment guidelines.

G Pradeepkumar, CEO, Union Mutual Fund, said the realignment of schemes would lead to churning of portfolios but in a phased manner.

Asked whether MFs chasing the 100 large-cap stocks would push up the prices of these stocks artificially, he said there is enough choice even within the limit as fund houses do not look at more than 40-60 large-cap stocks for investments.

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