Mutual funds: SEBI is considering this scheme to benefit MF investors

Mutual Fund Performance Fee Scheme: How Will It Benefit Investors?

Pankaj Mathpal, MD & CEO, Optima Money Managers, said the proposal is reasonable and it would be in the interest of investors if the TER is linked to the performance of the scheme.

“At present an equity scheme can charge up to 2.25% of the AUM even if the scheme is underperforming. I think SEBI will allow minimum expenses for custodian fees, registrar fees and audit fees etc. and performance linked incentives will exceed that minimum limit.”

over the past few years, SEBI Played an active role in reforming investment legislation, helping retail investors navigate their path. According to Vineet Khandare, CEO and Founder of MyFundbazaar, this new suggestion seems appropriate considering the current situation, where some mutual fund schemes Some have consistently underperformed while others have given exceptional returns at par with the best PMS schemes.

While some argue that these fees can lead to better results for both investors and fund managers, others doubt their efficacy and potential downsides. “On the one hand, since managers are motivated to maximize returns rather than simply collect a predetermined management fee, performance-based fees can match the interests of fund managers with the interests of investors. may require more effort and skill, which will benefit investors,” said Vineet Khandare.

Scripbox India reader is of the opinion that the introduction of performance-based incentives is a welcome move.

Challenges in quantifying the value added by fund managers

Typically, the fee structure is a combination of an AUM-based fixed fee and a variable fee based on the outperformance or ‘alpha’ generated by the fund. In case of active management strategies, the benchmark is an appropriate market index. The reasoning is that the investor would have been able to obtain the performance of the index through passive investing in the index itself. If there is outperformance on that index, the reward for the fund manager is in the form of a variable incentive, explained Bharat Phatak.

“Investors have to understand the concept of “relative performance”. If the underlying index has given a return of 15%, and the fund NAV has increased by 19%, there is an outperformance of 4%. The fund manager will get a return of this 4%. Incentive as a percentage of alpha. This becomes difficult in periods where the benchmark itself has given a negative result. For example, if the index has fallen 14%, and the fund’s NAV is down only 9%, still There is an ‘alpha’ of 5%. Variable charges are payable in this case, but investors will find it difficult to digest,” Bharat Phatak said.

Close-ended funds are in a better position to handle this if the incentive is paid at the time of maturity of the scheme and not in between, he said.

Inflows into equity mutual funds fell by up to 68 per cent As against a record inflow of Rs 6,480 crore in April 20,534 crore registered in the previous month, figures released by mutual fund association In India (Amfi) showed on Thursday. Also, fund collection through SIP reduced 13,727 crore from the record last month 14,276 crore in March. Within Equity, the small-cap category and mid Cap Category once again led the charge receiving flow 2,182 crore and 1,791 crore respectively.