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SEBI Caps Index Fund Expenses

SEBI has decided to cap the expenses that can be charged by an index fund to 1.5% of the assets under management. Till now, they were subject to an upper limit of 2.5%

Sometimes the watchdog does bite and not just bark, as critics would like us to believe. The Securities and Exchange Board of India, has decided to cap the maximum expenses that can be charged by an index fund to 1.5% of the assets under management. Till date, the figure was fixed at an upper limit of 2.5%, in line with any other equity fund.

This is certainly a welcoming move. The management of an index fund is far less tedious and effortless than any other actively managed equity fund. So there was no reason why it should charge as much as the others.

In an exclusive briefing to Value Research, M. Damodaran, Chairman, SEBI, said that this has been done in consultation with the Association of Mutual Funds India (AMFI), and that this is the first step towards rationalising them even further. He was of the view that since index funds are very small as of now, stricter expense limits should only be enforced gradually.

The 22 equity index funds (including the ETFs) available today manage only Rs 6,400 crore taken together. Of this, as much as Rs 5,800 crore is contributed by Banking BeES alone, and just one fund- Nifty Benchmark ETS-manages assets in excess of Rs 185 crore. However, this might change in times to come. The actively managed funds are increasingly finding it difficult to beat the indices. If this trend continues, Indian investors might shift towards index funds, as has been the case in countries like USA.

While the regulation will enforce the discipline, a majority of the index funds available today are already in compliance with the new expense limits. Of the 22 index funds, just three funds (LICMF Index Nifty, LICMF Index Sensex and Magnum Index) charge expenses in excess of 1.50%. While the two LICMF schemes are the costliest (charging the maximum 2.50%), Magnum Index is charging 2.09%. But now, these three will have to rationalise their cost structures to bring their expenses down.