What is the effect of recent SEBI circular regarding NAV on retail investors? What is the rationale of changing the expense ratio very frequently as noted in my fund, L&T midcap? Can't you show a separate AUM for regular & direct options on the VR site?
- Sanjeev Purohit
These are three separate questions with different contexts. Until now, it was possible that if your investment was up to rupees two lakh, you could deposit a cheque and if your investment was registered or time stamped before 1 o'clock, which was the cut-off time on that specific date, you would get the evening's NAV. So, earlier, your invested amount, excluding the stamp duty, divided by the NAV of that specific date was the number of units allotted.
Now, this rule has changed. The rule that earlier was applicable to all investments of Rs two lakh and more is now applicable to all investments in mutual funds, irrespective of the amount. So, no matter what the size of your investment is, you will be allotted NAV only when the fund company receives the money.
This change, however, has no bearing on digital investments because online investment mandates that the money is debited from your account and credited to the fund company's account at that moment itself with a timestamp. Likewise, it has no bearing on all your ECS mandate and other things because they are auto-debited from your bank account. So, it affects only the cheque that you write to a fund company and go with an application form for your investments. It is a fair system. This is because you writing a cheque doesn't mean that the fund company has received it and it is fair to all other investors as well.
To answer your second question as to why expenses vary or change often, this is simply because expenses are variable. A little less than two years ago, SEBI made changes in the expense ratio.The rationale for this change is that as a fund gets bigger, it should charge lower expenses and economies of scale should translate into some advantage for investors.
So, for AUM up to Rs. 500 crore, equity funds are allowed to charge up to 2.25 per cent and the corresponding number for debt funds is 2 per cent. So, it goes down by 25 basis points i.e. one-fourth of a percentage for every amount bracket up to 10,000 crore and after that, for every additional 5000 crore added to the AUM, fund companies are supposed to reduce expenses by 0.05 per cent. That is for the equity fund and for the debt fund, it is relatively low. It reduces from 1.25 per cent for AUM up to 10,000 crore and subsequently, five basis points thereon for every 5000 crore. So, as a fund gets bigger in denomination, expenses go down. Of course, over and above this, there is a GST of 18 per cent.
On top of it, AMCs are being incentivised to sell mutual funds. Therefore, they are allowed to charge a maximum of extra 30 basis points. Earlier the incentive was for mobilising money from beyond top 15 cities but now it is for beyond top 30 cities. The move was made to extend the reach of mutual funds across the country.
So, if a fund company is able to mobilise 30 per cent of its incremental money, i.e. new money, from B-30 cities, they can charge a maximum of 30 basis points more. So, all these combined mechanisms translate into variable expenses. SEBI has also mandated that whenever expenses change, investors should be informed. Now, you are being informed about all the changes in expenses so that you can take a decision based on a relative view of how other funds are doing and their costs as compared to your funds.
To answer your third question as to why we don't show the AUM of regular and direct options separately, this is simply because we don't get it. The disclosure is not independent i.e. it is not made separately for these two plans. So, we cannot.