Sebi blasts MFs for adopting unsustainable biz model

KN Vaidyanathan, Executive Director in charge of mutual funds and foreign institutional investors, Securities and Exchange Board of India (SEBI), says the mutual fund industry has built an unsustainable business model. "The industry is cost unconscious." His comments come close on the heels of a meeting with brokers/mutual funds on January 6, reports CNBC-TV18's Vivek Law.

According to him, the cost of fund raising has risen from 1.5% in the 90s to 4% at present. "The fund raising cost from the banking channel stands at 12-13% from 2006-08."

He feels the industry was paying too much in the form of commissions and churning and that is the reason why it is facing such a high cost of raising funds.

He says there is a clear indication of heavy churning during this period. "The cost of fund raising through individual financial advisors stands at 2.5%." Unit holder servicing cost, he added, stands at 7-8 basis points (100 bps=1%) per unit holder. "Direct equity servicing cost is one-tenth of a basis point."

He calls on the MF industry to bring cost down of servicing unit holders to 1 basis point. "This could save Rs 500 crore annually. MFs will have to use the infrastructure of stock exchanges, depositories to lower costs."