MFs confused over new norms, struggling for clarity

SEBI's revival plans for the mutual fund sector have not only garnered mixed reactions from the industry, but created confusion, especially with the implementation of total expense ratio on schemes outside the top fifteen cities. Infact, AMCs have come up with different versions on this SEBI mandate. CNBC-TV18's Mitra Joshi and Archana Shukla explain.

In order to allow mutual funds more flexibility, SEBI has allowed asset management companies to charge an additional expense ratio of up to 30 basis points on the daily net asset value (NAV) of schemes, provided the net inflows are received from locations beyond the top 15 cities in India. But this new mandate is creating confusion amongst AMCs. Puneet Chaddha, chief executive officer of HSBC Mutual Fund says, "The method to calculate the flows, which will result in this additional charge, was open to two-three versions or interpretations. So, clearly the industry wasn't in the know in terms of what model will be precisely acceptable to the regulator." Direct MF investment plan: A blow to distributors What are the different versions doing the rounds? What is the real interpretation of this model? Some AMCs believe that 30 bps rule can be applied, if incremental flow in a year is more than 30 percent. Others say, 30 percent should be the total volume of the business mix. That means inclusive of business from the top 15 cities. Third version says that an AMC has to sustain 30 percent of the business coming from cities outside the top 15. But the real version is, an AMC has to maintain 30 percent of business for 1 year and it has to be periodically checked by the particular AMCs.  Only then, they are liable to charge 30 basis points to investors, who are not in the top 15 cities. But the industry complaints that it is difficult to keep a tab on the inflows. Moreover, misuse of this rule cannot be dismissed. N Sethuraman Iyer, chief executive officer, Daiwa Mutual Fund says, "It increases the complications in terms of accounting and operational issues. I don't believe one can clearly understand the mechanism as to how much flows are going to happen beyond the 15 cities." Infact, as per industry insiders, some AMCs have started charging additional 30 bps to investors even in the top 15 cities. If this carries on, nearly 85 percent of MF clientele who are based in the top 15 cities will have to end up paying more as well. Now, all eyes are on SEBI, if it will bring out a clarification to stem mis-interpretation of its circular.