MFs gain, investors lose as expense ratio is hiked

Investing in mutual funds has become more expensive mainly because of the 25 basis point hike in expense ratio and the levy of service tax. But CNBC-TV18's Mitra Joshi reports that fund houses are trying to ease the burden by adjusting the exit load.

Reviving the mutual fund industry will come at a cost to investors. That's because the finance ministry and mutual fund houses have decided to hike the expense ratio and impose a service tax on this ratio. Here's how this works: The current expense ratio, inclusive of service tax, comes to 2.5% of investment. This includes the 1.25% management fees, and other expenses incurred by the AMC like registrar & transfer fees, audit fees, and commission to agents. But now, the expense ratio has been hiked by 25 basis points to 2.75% of investment, with an additional 12.36% service tax on this higher expense. This puts the real expense ratio at 3.09% of investment. But distributors welcome the move. Gajendra Kothari, the managing director and CEO, Etica Wealth Management says, “Currently, as per the existing scenario, the distributors get half a percent upfront fees in equity funds and half a percent trail fees for the assets as long as it remains in the fund. With this proposed increase in the expense ratio there should be a room of quarter percent more to the distributors in the form of trail fees year after.” But AMCs are now looking to placate investors. They are working on transferring the exit load into the scheme corpus, rather than earmarking it for marketing and distribution, meaning a higher net asset value. Jimmy Patel, CEO, Quantum AMC says, “Its a very simple calculation, its the existing corpus plus the exit load collected, results in increase in net assets and it benefits the continuing investors and it gets reflected by the way of a higher NAV.” SEBI will now have to clear these proposals... and is expected to take them up at the next SEBI board meeting on the 16th of August.