The rise in expenses charged by mutual funds is an issue that impacts all investors. According to the most recently released numbers by fund companies; equity and hybrid fund (which are what retail investors invest in), now charge an average of 2.42 per cent per annum of assets managed by them, way up from last year's 2.06 per cent. To the untrained eye, this may not seem much, but it is an increase of 17.5 per cent in the charges.
Effectively; higher returns would mean a lower relative impact while lower returns would mean a higher impact on overall returns. The reason obviously is that the expenses charged are proportional to the money being managed and not the returns.
The reason for increase in expenses is also to do with the change in SEBI rules. SEBI allowed the cross-subsidy in order to get funds to expand to smaller cities. So, getting fresh investments from outside the 15 largest cities earns AMCs an extra percentage of the entire asset base that they have. They can charge up to 0.3 per cent extra expenses on the entire assets for getting 30 per cent of assets outside the top 15 cities. Lower percentages will mean a correspondingly smaller extra expense chargeable. The final impact is that of service tax. Earlier, service tax was paid out of the funds' part of the expenses but now it's paid on top of expenses by investors.
One way to reduce the impact of rising expenses is to invest in direct plans, where investors pay lower expenses because they bypass the distributor. Direct plans are available for all funds. When we compared the old expenses of each fund to the new expenses of the direct plan of that fund; it turns out that expenses have actually gone down. On average, the direct plan of each equity and hybrid fund charges 24 per cent less than the older, lower expenses. There is definitely a case to invest in direct plans to reduce the impact of expenses.
COST MATTERS
- Equity and hybrid fund expenses have gone up by 17.5 per cent in the past one year
- Earlier fund management fee was limited to 1.25% and the overall limit ranged between 2.5% and 1.75%
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