By Mr. Manoj Nagpal, CEO, Outlook Asia Capital
Over the past few years, mutual fund (MF) expenses have
increased by 0.50%-0.75%.
Earlier, an average equity mutual fund used
to charge 2%-2.25% which has now increased to 2.50%-2.75%. This is a 25%-30% cost escalation for MF investors.
As a mutual fund investor should you be worried about
this cost increase?
One view is that the significant out performance of Indian
equity mutual funds over their benchmarks makes the discussion of expenses
irrelevant.
Equity mutual funds have delivered a significant alpha over two
decades and higher expenses do not really matter.
The cost brigade on the other hand argues that higher
expenses are a wealth-drain for a long-term investor and with assets under
management (AUM) increasing costs should logically be reduced as economies of
scale kick in.
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| Manoj Nagpal, CEO, Outlook Asia Capital. |
Let's try to quantify this cost increase for a long-term
investor with a time horizon of 10 to 20 years.
For a goal-based Systematic Investment Plan (SIP), you need to
immediately increase your SIP amount by 5%-10% to nullify this
cost increase or / else you will fall short of your defined goal.
So, if you are
contributing monthly Rs 10,000 towards your SIP, then increase it to Rs 11,000
so that your final corpus target remains the same.
Similarly, for a long term
lump-sum investor, increase your investment by 6% to 12.5%to
counter this cost increase.
One can argue that for a long-term investor this
cost increase by Securities and Exchange Board of India (SEBI, is in effect, equivalent to 5% to 12.5% entry load.
If SEBI is really serious to reduce costs, then it should
do the following 3 things.
First, plug the loopholes. Take the example of
additional 0.20% (20 basis points -bps) in lieu of the exit load. The actual credit
back of the exit load to schemes is a small fraction of 0.20% collected. This
should be limited to the actual exit load collected.
Also, schemes such as Equity Linked Savings Scheme (ELSS) / close-ended funds, which do not have an exit load, still charge the
additional 0.20%. This should be stopped.
Second, the additional 0.3% (30 bps) for beyond top 15 cities (B15 cities) should be phased out in a defined time frame.
There can not be an indefinite additional cost for
long-term investors.
And, last, any scheme over Rs 700 crore of assets has the
same expense limits.
SEBI should increase these slabs with lower limits of
expenses as the paradigm of fund sizes has changed.
CONTACT DETAILS
Mr. Manoj Nagpal
MD & CEO,
Outlook Asia Capital
E mail id :m.nagpal@Outlook.com
C : +91 - 98202 - 93966
Reach :
Sheela.Ahuja@Outlook.com
Registered Office:
79, Yashodha, Irla Bridge,
S.V. Road, Andheri (West), Mumbai, India.
BRANCH OFFICE - Mumbai
Appejay House,
3 Dinshaw Vachha Road,
Churchgate, Mumbai - 400020
Tel: +91-22-2202 9966
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