SEBI mulls to make MFs' brokerage fee part of expenses

It is learnt from the sources that SEBI's mutual fund advisory committee is thinking over the possibility of making fund house pay the brokerage fees as well as securities transaction tax from their own pockets. CNBC-TV18's Vidhi Godiawala reports more quoting sources on what it means to the Mutual Funds (MF) industry.

Essentially, mutual funds pay a brokerage fee for their trades which currently are part of the cost of acquisition of the share. For example, hypothetically if a fund manager buys ten shares for Rs 100 and the brokerage on that is about Re 1, then the total cost of acquiring that share will be Rs 101 and not Rs 100 which is the actual cost of the share. About 12.5 bps of STT will also be added on that brokerage. Currently, this goes as part of cost of acquisition of the share. The sources have informed that the committee is mulling a proposal where the mutual fund houses will have to pay from their own expense ratio. Currently, the expense ratio goes towards money management fees, custodial charges, marketing fees, etc. Fixed income, SIPs driving bulk of growth: IDFC MF It is understood from sources that SEBI's rationale is that the mutual funds should incur this brokerage fees as well as the STT in the total expense ratio. The expense ratio for the fund houses is capped at 2.5% by SEBI. On an average, mutual funds expense ratio varies between 1.25 to 1.5%. They have a gap or headroom of 100 bps in case this rule comes in place, but mutual fund managers are not very happy with this proposal as it would increase their costs and managing expenses would get difficult. The brokerage paid by mutual fund houses is negotiated, but in terms of the actual cost, it varies from fund to fund because it depends on number of transactions and trades done by the fund manager. This proposal is in its early stages. It is also learnt that the committee has asked the industry body representatives Association of Mutual Funds of India (AMFI) to come back with all the data from the industry and fund houses in terms of impact this would have on them. The fallout, if this is implemented, could be the impact and pressure on brokerages in terms of getting business from mutual funds as they will have to pay from their own pockets. Also watch the accompanying video.