Additional Expenses: Amfi tells MFs to pass on benefits to investors

Mutual Fund industry body Amfi today asked asset management companies (AMCs) to pass on to investors the benefit of steep reduction in additional expenses charged for schemes, industry official said.

The market watchdog, through a notification issued on May 29, drastically slashed the 'additional expense' charged by mutual funds to just 5 basis points from 20 basis points, as part of its effort to help increase the penetration of such products among investors.

One basis point is one-hundredth of a percentage point.

The move is aimed at reducing the cost of investing in mutual funds (MFs).

In a letter written to fund houses, Association of Mutual Funds in India (Amfi) said the 15 basis points reduction in expenses should be passed on, by reduction in distribution commission by the AMCs, a senior official of a leading fund house said. 

Besides, it has asked fund houses to "revise/ re-align their distribution commission pay out structure accordingly".

The board of Sebi in March had approved a proposal to reduce the additional expenses in respect of mutual funds from 20 basis points to 5 basis points.

Following this, Amfi had discussed the matter at its board meeting held last month and the board members had reiterated that the proposed reduction in expenses should also be passed on, by reduction in distribution commission by the AMCs.

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Currently, there are 42 mutual fund houses managing assets to the tune of over Rs 23 lakh crore. 

The regulator in 2012 had permitted MFs to charge 20 basis points of assets under management of the scheme in lieu of exit loads, or the sum mobilised from investors when they offload holdings.

In case of open ended equity and balanced schemes currently, the additional expense charged is significantly higher than the actual credit back of exit load to the scheme. In comparison, the additional charge is lower in the case of open-ended debt schemes.

Across all open ended equity and balanced schemes, an average exit load of around 5 basis points has been credited back whereas an average additional expense of 18-20 basis points has been charged to such schemes.