Mind your expenses

SEBI recently initiated a study of existing fees and expenses charged by mutual fund houses. While AMC bosses usually view such initiatives as another exercise in trimming expense ratios, I think SEBI should look at two other urgent issues that need fixing. First is that AMCs are paying higher commissions for newer funds, potentially creating incentives for distributors to churn investors' money, a malpractice SEBI has worked hard to discourage over the years. Second, higher commissions of new funds have led to exceptionally low expense ratios for their direct plans. While it may be a blessing for now, it will eventually impact direct plan investors negatively once AMCs stop promoting these funds aggressively and reduce the commissions. Both these matters have significant implications for you, the investor, and therefore must not be ignored. Need for SEBI scrutiny Before examining these issues more closely, let's begin with a more fundamental question: is SEBI really unfair in its unrelenting focus on costs? Well, even if the expense ratio is over-regulated, I think that's how it should be. While you normally expect market forces to take care of prices in a competitive and transparent industry, mutual funds, particularly equity funds, are a strange beast. Performance in this industry is such a big driver that if a fund does well, expenses don't matter - even if they are on the higher side. Conversely, if a fund doesn't do

This article was originally published on March 07, 2023.