Fund houses asked to stop charging extra expense ratio due to misuse
03-Mar-2023 •Aakar Rastogi
The Securities and Exchange Board of India (SEBI) has sent a letter to the Association of Mutual Funds of India (AMFI) asking the fund houses to not charge an additional expense ratio for providing an incentive to the distributors who sell mutual fund schemes in B30 cities.
The mutual fund industry classifies cities into two categories: Top 30 (T30) and Beyond 30 (B30). T30 cities include metros and larger cities like Delhi, Mumbai, Pune, Bengaluru, Kolkata, and Lucknow, while other cities are known as Beyond 30.
Previously, SEBI allowed fund houses to charge an additional expense ratio of 30 basis points (0.30 per cent) on new inflows of up to Rs 2 lakh from B30 cities. This was done to provide distributors with a higher commission in the first year to encourage them to promote and sell mutual fund schemes in smaller cities.
However, SEBI has observed the misuse of this additional expense ratio, with unnecessary splitting of investments and churning of portfolios. For instance, since the incentive was available only on investments up to Rs 2 lakh, distributors were splitting the investment. Moreover, the incentive is only available in the first year of investment, resulting in unnecessary churning. As a result, SEBI has suspended the additional expense ratio for the time being.
As of January 2023, B30 cities account for only 17 per cent of the total assets under management (AUM) of the mutual fund industry. The geographical break-up can be seen in the chart.
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