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, 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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  1. All this is about the increase in expense ratio from 2.5% to 2.75%. Please confirm.
    It is upto the AMC, whether how much expense ratio it wants to keep for a fund. AMC can chose to have a lower expense ratio. Please confirm.
    As a customer, I can look at expense-ratio and make it a component of my decision about chosing the fund. Please confirm. (For e.g. I may chose Quantum over a higher expense-ratio fund, everything else being equal).

    So isn’t an expense-ratio aware customer the solution to this new development?

  2. Unfortunately Sambaran in one of the ULIPs which I saw recently the low cost of the fund ws completely LOST by the pathetic fund manager that they have.

    Largely it is true that ‘lower the cost, better the chances of a fund making money FOR THE INVESTOR over the long run’. However over a 4 year period, the answer may / may not be true.

    Chasing a fund because its expenses are lower is far, far, far more sensible than chasing a hot fund, a fund manager, or the star rating.

  3. 0.25% increase in AMC and I started Crying… Why the world is so twisted for the Underprivileged people (read Customer). Subra isr like you, me too thinking of this change for a couple of days now.
    Evil evil regulators !

  4. Thanks Subra for your response. So it is true that only the upper limit of expense ratio has been raised to 2.75%. Fund house can choose to keep a low expense ratio. The customer (if aware) can choose to make a decision based on low-expense-ratio given everything else is same.

    On a different note:
    Assume the distributors/AMC need more money to survive. Regulator has two ways to extract the money from customer/investor. Either impose entry load or increase the expense-ratio-ceiling. Isn’t expense-ratio-ceiling-raise the lesser evil? Now at least the distributor will have no stake in brainwashing and churning the investor’s portfolio.

  5. Mahesh – why are u blaming the regulator? he has only fixed the upper ceiling. In the share brokerage business the upper limit is 2.5% – the actual charge that I pay is .05% for delivery.

    if more and more people choose funds sensibly amc charges will come down. It is not rocket science that a fund house which charges less will attract more money…and therefore have more aum. More aum will let them charge the virtuous cycle can continue.

    However unlike term insurance a competent fund manager can work like magic ….so the decision is tough.

  6. With these high expenses in place, the investor wouldn’t be left with much low expense indirect equity options. Even the Index Funds run with high expense ratio here.

  7. Wish the regulator had linked a portion (say 25%) of the charges with the funds performance vs its benchmark ATLEAST…

    Let the fittest and strogest only survive and make money too. Good atleast that the entry load is not brought back.

    So long as governance is bad, economy will suffer
    so long as economy is bad, market will suffer
    so long as market is bad, investor will suffer
    so long as investor suffer, nobody will invest/ no capital flows and MF industry SHOULD suffer too.
    Rest anologies sab bakwaas hai… just to drive out the already shrunk faithfuls of indian story… 🙂

  8. Answers to the Quiz (to bailout the n00bs among us):
    (All approximate amounts with IRR 10%)
    Load 0%, FMC 0%: 22.8 Cr
    Load 0%, FMC 2%: 15.00 Cr
    Load 2%, FMC 2.5%: 13.3 Cr
    Load 2%, FMC 2.9%: 12.3 Cr

    the party’s just starting for the AMCs and the distributors

  9. so sorry I forgot the most important one – 0 load and 2.90 amc charges….let me assume it comes to about 12.9 crore.

    the gap between 22.8 and 12.9 is what the Amc is taking from u for expenses and fees.

    Is there somebody who is worried that the amc’s are not making money? do not worry. Worry for your own money esp in a fledglng situation is easy to understand

  10. Sir

    Why not they make money based on performance too. One best case study is that Reliance natural resources a NFO in 2007 is in the negetive after almost 5 years and eating the investors money and is still having 1600+ crores in its kitty while HDFC balanced which is giving a 10+ returns in not even managing 700crores…

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