The largest category of debt funds - ultra short term funds - which were the erstwhile liquid plus funds, are seeing a hike in their expense ratio.
Typically in the past, the top performers in this category have kept their expenses on the lower side to deliver that little bit of out-performance. This helped them stay ahead of the curve. The reason expenses play a crucial role in debt funds is that unlike an equity fund, a 1 per cent differential could result in a top quartile or bottom quartile performance. Now the general trend reveals that they are no longer willing to play that game. In 2007 and 2008, the funds with an expense ratio of less than 1 per cent tended to occupy the top places in the performance charts. But that was not the case in 2009 and 2010.
Out of the 14 funds currently in the top quartile, one is a new fund, the second has kept the expenses unchanged (it was already charging more than 1%) and another has actually lowered expenses. The balance 11 funds have raised their expense ratio on an average 30 basis points (0.30%). This trend is visible among other funds in the category too - the median expense ratio of the category in 2008 was 51 bps 0.51%) which was 71 bps (0.71%) in 2009.
Another reason of this increase in expense might be attributed to the fact that ultra short term funds are now the largest debt category, displacing liquid funds from that position.