There is a provision to increase the expenses that the ‘aam aadmi’ will pay for the services of an asset management company…so welcome to the party. I mean the party that the AMCs will now start having.
What are my objections to the new provisions? Frankly, I have no strong opinion on what the regulator should / can do, and I am also convinced that the regulator speaks the language of the strongest player. So what the strongest player wants gets done, normally.
But hey, here are my views (read, then ctrl+alt+del)
1. A load is a clear charge: a load say at 1% is a clear charge and easy to understand and it was easy for the regulator to say upfront commission = entry load.
This was much better than increasing the asset management charges and ‘hoping’ that the amc will pass it on to the distributor. This is like my driver telling my maid ‘Subra’s salary has gone up, SO OUR SALARIES have to go up’. Sorry, not true, it depends on MY discretion. Replacing a clear charge by a complex one is a fantastic first step towards obfuscation.
2. Fungibility: Well, well almost nobody has objected to this. You should ask an auditor of an amc how difficult it is to find out which expense is ‘chargeable’ and what is not. Also some of the service providers were enjoying the fact that the Amc was not too much worried about expenses like ‘courier charges’ which were chargeable.
What is Fungibility? Well the new norm says the total expenses that a fund can charge a scheme is 2.5% – if the the expenses are only say 1.2%, then the fund house can charge asset management charges of 1.3%. Earlier the 2.5% had sublimits of 1.5% for expenses and 1% for fees – now the overflow goes to the amc. This will also suddenly make the funds negotiate harder with the service provider!
Let us look at the expenses which are chargeable to the fund (which means it reduces your NAV, dude). These like statutory expenses, printing and sending the statement (once a year), half yearly advertising, custodian charges, bank charges for the scheme, advertisement specifically for a scheme – legal requirement, audit fee – (largely scheme specific expenses) etc.
Now if you see it closely, NOT all the expenses are related to the ‘Assets Under Management’. For example the courier charges is a function of number of folios, the audit fee is a function of time taken, ..so as the size of a fund increases, the expense in ABSOLUTE terms increases, but, in %age terms it has to fall. If say the corpus is Rs. 100 crores, I may be spending MORE than 1.75% p.a…but as the size increases, it may come down to say 1.2%. In the existing scenario the fund will charge only1.2%..and the unit holder benefits by that 0.3%. In the proposed scenario the fund house will pocket this 0.3%. Hence the larger fund houses are dancing all the way to the bank.
The other worry is of course ‘soft rupee commission’ but that is for a different day. Please do some research on this term.
If you are wondering why the fund houses will not want a direct entry load is very simple. The bigger distributors will sit across the counter and tell the fund house….’I have a Rs. 22 crore cheque…tell me how much will you give’. A salivating amc will bid any high number and tap that money. Very good for the customer?
Do not rush, his overall return may hurt bad enough even in good markets….
OMG if i hav confused you enough, ask more questions. Remember the stupidest questions are the ones that you did not ask…..
For those who are NOT innumerate go to excel and see what is the FV (Future value) of a sip of Rs. 100,000 per month for a period of 30 years. Make the following scenarios:
Load 0, Fund mgt charges 2%; Load 2% FMC: 2.5%, Load 0% FMC 2.90%; Load 0% Fmc 0%
surprised? shocked? Innumeracy helps. Those who do not calculate can R.I.P.
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