Mutual funds have been able to change the financial landscape of investors, the world over. However, despite being potentially the best investment option, MFs have failed to find a permanent place in the investment universe of Indian investors. No wonder, Indian investors' participation in mutual funds has remained low at less than 4 percent. The traditional investment options like fixed deposits, bonds, small savings schemes, and debentures continue to be the preferred options for majority of investors in our country.
Securities and Exchange Board of India, in its effort to re-energize the MF industry and to ensure its sustainable growth, announced a few guidelines recently. Here is what these guidelines mean for existing as well as new investors:
Single plan structure In order to ensure that all investors are subject to one expense structure, SEBI has made it mandatory for the fund houses to have a single plan under all their schemes i.e. both new as well as existing ones. Therefore, existing schemes with multiple-plans based on the amount of investment (i.e. retail, institutional, super institutional, etc) are now accepting subscriptions under only one plan.
Although discontinued plans have stopped accepting fresh subscriptions, it has not affected existing investments of investors. Investors can redeem their holdings any time. Besides, transactions relating to moving money out of these plans through either a Systematic Transfer Plan (STP) or a Systematic Withdrawal Plan (SWP) will continue to be honoured till there is a sufficient balance under the plan.
Re-investment of dividend declared under discontinued plans is being handled differently by fund houses. While some of the mutual funds are allowing the dividend declared under the discontinued plans to be reinvested under the retained plan, others are compulsorily paying out the dividend, if such an option exists. If not, no dividend will be declared by the Scheme under the discontinued plan and the movement in the NAV will be on the lines of a growth option.
The important point to note here is that multiple plans existed mostly in debt funds like liquid, ultra short term, short term, income and gilt funds. The instances of equity as well equity and debt oriented hybrid funds having multiple plans were very few. In any case, most of the fund houses have decided to retain retail plans under equity and hybrid fund category. Under the debt fund category, it is a mixed bag.
In other words, the decision to have a single plan is not likely to impact retail investors in a major way. In fact, wherever fund houses have reduced minimum investment amount and expenses in the retained plan, it would make sense for investors to move from the discontinued plan into the new plan after considering tax implications.
Direct PlanSEBI has also mandated that effective January 1, 2013, mutual funds shall provide a separate plan for direct investments i.e. investments not routed through a distributor, in existing as well as new schemes. It has also mandated that such direct plans shall have a lower expense ratio excluding distribution expenses, commission etc., and no commission shall be paid from these plans. Accordingly, these plans will have separate NAVs.
While the step taken by the Regulator would apparently be beneficial to investors, it would be appropriate for them to consider how they feel about handling their hard earned money on their own, before making a decision. Although MFs are a simple investment vehicle, investing in them is not always easy. Considering that there are hundreds of schemes to choose from and it is vital to ensure that the portfolio remains on track at all times, the entire process can be quite overwhelming for investors. Besides, investors also need help for handling various service requests throughout their time horizon.
Moreover, considering that mutual funds have a very low penetration in our country, it would be interesting to see how many investors would be able to overcome their inhibitions about investing in market related products on their own. If they fail to do so for want of sound advice, their financial future will be compromised in a big way.
Needless to say, if an investor feels confident about making his own investment decisions, he would benefit from lower costs. If not, then putting too much emphasis on cutting cost can eventually prove to be a costly mistake. Therefore, the key is to analyze the contribution made by your advisor in the investment process and then take a decision.
Applicability of NAV across schemesSEBI has mandated that for applications with an amount equal to or more than Rs. 2 lacs, the applicable Net Asset Value (NAV) will be the closing NAV of the day on which funds are available for utilization before the cut-off time. Earlier, the applicable NAV used to be the closing NAV of the day on which application was submitted, subject to realization of the cheque. In other words, if an investor makes an application for Rs. 2 lacs or more on Monday, and the funds become available to the fund house before the cut-off time on Wednesday, the applicable NAV will be the closing NAV of Wednesday. It is a good step from existing investors' point of view as new investors will get to participate in the scheme only from the day when the fund receives the money. Moreover, it will curb the tendency of investors to time the market. Of course, it would pose an operational challenge to the fund houses to keep track of realization of cheques.
There is no change with respect to applicability of the NAV for purchases/ switch-in for amount of less than 2 lacs. For switch-in transactions of Rs. 2 lacs and above, the applicable NAV will be the NAV of the day on which the funds are available for utilization before the cut-off time, by the respective switch-in scheme.
Therefore, for applications of Rs. 2 lacs or more, it would be advisable to transfer money thru RTGS to invest at the closing NAV of the same day. Besides, for select banks, investors can also transfer the money from their account to the Scheme’s account and submit the applications to the fund house.
Total Expense Ratio (TER)In order to allow mutual funds more flexibility, SEBI has allowed fungibility of the expense ratio. Besides, MFs have been allowed to charge an additional TER of up to 30 basis points on daily net assets of the scheme, if the new inflows from beyond top 15 cities (based on Association of Mutual Funds in India (AMFI) data on AUM by geography) are at least (a) 30 % of the gross inflows or (b) 15 % of the average assets under management (year to date) of the scheme, whichever is higher. In case, inflows from beyond 15 cities are less than the higher of (a) or (b), additional TER will be charged on a proportionate basis.
MFs have also been allowed to charge service tax on investment and advisory fee to the scheme in addition to the maximum limit of TER. This was being borne by the Asset Management Companies (AMCs) earlier. There is also a provision of clawing back the additional TER charged, if the money is redeemed within one year from the date of investment.
Besides, any exit load charged to investors has to be credited to the Scheme. Since amount collect through exit load was earlier available to the AMCs to cover marketing expenses, SEBI has allowed them to charge an additional expense of 20 basis points to offset this. It is broadly estimated that this trade-off will not result in any additional cost to investors.
However, the burden of the additional TER of up to 30 basis points allowed to increase the penetration of mutual funds across the length and breadth of the country will fall upon existing investors too. Clearly, it is not good news for them. Hopefully, if inflows from beyond 15 cities increase over a period of time, the impact could lessen. A portfolio of well performing funds also can minimize the overall impact of additional expense to an extent. However, there is no denying that despite the additional TER, mutual funds remain the most versatile and tax efficient investment vehicle for investors with varied investment goals and time horizon.
Product labellingSEBI has initiated a process that will require mutual funds to label their products. This process will specify the suitability of the products to certain class of investors. This will ensure that investors do not end up taking more risk than their defined risk profile.
Focus on Investor educationMutual funds also have to annually set apart at least 2 basis points on daily net assets within the maximum limit of TER for investor education and awareness initiatives. This will make a substantial amount available to the MF industry annually to create awareness and educate investors. If this money is spent judiciously and in an organized manner, it can go a long way in not only expanding the market but also allowing investors to benefit from this wonderful investment vehicle. While professional help would still be required to invest in MFs, enhanced knowledge about the concept of MFs and various products would allow investors to participate actively in the decision making process.
