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Investors in 'Bharat-friendly' funds to pay more

N Sundaresha Subramanian / New Delhi 20 Aug 12 | 12:15 AM

Pray that your fund house doesn’t have a strong presence in the hinterland. For, the greater its reach across the country, the higher you will have to shell out on your mutual fund investments following the latest measures announced by the Securities and Exchange Board of India (Sebi).

According to a Business Standard analysis, investors in the schemes of UTI, HDFC, LIC Nomura, SBI MF and Reliance MF look set to incur the steepest rise in charges on their investments as they already have a significant country-wide presence, sourcing 17-25 per cent of their assets from smaller locations.

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In its board meeting last week, Sebi decided funds would be “allowed to charge an additional total expense ratio (up to 30 basis points) depending upon the extent of new inflows from locations beyond the top 15 cities". The Total Expense Ratio (TER) is the amount expressed in percentage of total investments the fund house charges its investors to meet operating expenses, asset management fees, administration expenses and other asset-based costs.

According to the statutory disclosures of these top 20 fund houses, which manage 90 per cent of the industry’s assets, UTI AMC has the highest geographical spread with 24.24 per cent of the Rs 60,923 crore it manages coming from outside the top 15 cities. That is followed by LIC Nomura, which sources 21 per cent of its assets from smaller towns. HDFC Mutual fund (20.2 per cent), SBI MF (19.02 per cent) and Reliance MF (17.66 cent) are other asset managers with a wide presence.

While Reliance MF and UTI have presence in 150 centres each, funds such as HDFC, SBI MF and LIC are supported by a strong presence of their parent organisations in addition to their own networks.

According to Sebi, fund houses will get to charge an additional expense in the proportion of incremental flows from smaller towns and cities. “AMCs will be able to charge 30 bps if the new inflows from these cities/towns are a minimum 30% of the total inflows. In case of lesser inflows, the proportionate amount will be allowed as additional TER," the Sebi release said.

Thus, while the scale of additional expense will be determined by the proportion of inflows that come from outside the top 15 cities, the additional charges will be payable by all investors as the TER is calculated on the entire corpus.

“If you achieve five per cent (from these centres) of incremental inflows, then you get five basis points and so on. This will be payable by existing investors also," said Dhirendra Kumar, CEO, Valueresearch, a tracker of mutual funds.

So, even if these top houses just maintain their current spread in the new inflows, they will be able to levy significantly higher charges on existing investors. On average, Indian equity funds charge expenses of a little over two per cent, among the highest in the world, according to a recent Morningstar study. So, if they achieve the 30 per cent target set by Sebi, they will be able to charge up to 30 bps more, making the funds 15 per cent more expensive for the investor.

Rajiv Bajaj, managing director, Bajaj Capital, a Delhi-based distributor, said, “The larger AMCs will gain the most. To what extent they will expand the reach will depend on how much they are able to pass on to the distributors. If they are focused on swelling their bottom line, then it will be a different story." Baroda Pioneer, Religare, JM Financial, IDFC and Deutsche are funds with the least presence in smaller towns. These funds sourced less than six per cent of their respective assets from outside the top 15 cities.

Industry players said they needed to wait for the fine print of the regulations to know whether the calculations of new inflows and additional TER would be based on the geographical spread at the individual scheme level or at the fund house level.

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