Cap on Index Fund Expenses

Sometimes the watchdog does bite and not just bark, as critics would like us to believe. SEBI has decided to cap the maximum expenses that can be charged by an index fund to 1.5 per cent of the AUMs. Till date, the figure was fixed at an upper limit of 2.5 per cent, 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 other funds. In an exclusive briefing to Value Research, SEBI chief M. Damodaran said that this had 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 index funds already comply with the new norms.