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Some Become More Equal!

Some AMCs have introduced even lower cost plans for very big-ticket investors. The main advantage for creating such super institutional products is to pass on most of the returns generated by the fund to the investor.

If retail investors were unhappy to see the load structure for institutional investors, then this is going to make them unhappier. The conventional institutional plans are variants of debt schemes, which cater to big-ticket investors. It works well for the AMCs as the cost of mobilising funds is very low as compared to collecting small amounts from a large number of dispersed investors. These reduced expenses are passed on to the big-ticket investor who benefits in the form of better returns.

But recently, a few AMCs have gone a step further by introducing additional plans for the institutional investors, which charge even lower expenses than the normal institutional plans. These are only available to very large investors, with minimum investments of Rs 20 crore.

Institutional Funds: The More the Merrier
Ultra short-term Inst  Min. Initial Inv (Rs Cr)  Expense Ratio**
Birla Cash Plus Inst. 1 0.65*
Birla Cash Plus Inst. Premium 20 0.55*
HDFC Liquid Premium 5 0.74
HDFC Liquid Premium Plus 20 0.63
Kotak Liquid Inst 1 0.74
Kotak Liquid Institutional Premium 10 0.65*
Prudential ICICI Liquid Inst  5 0.75
Prudential ICICI Liquid Inst Plus  20 0.60*
Tata Liquid HI  1 0.08
Tata Liquid Super HI  10 -
** as on September 30, 2003
* Stated expense ratio

The main advantage for creating such products is to pass on most of the returns generated by the fund to the investor. Since each unit holder in these schemes has a high investment, the cost of servicing each of them is very low, thus enabling the fund companies to charge lower expenses. Most such variants of institutional plans are in the cash fund category. At present, five AMCs offer such product: Birla Sun Life, HDFC, Kotak, Prudential ICICI and Tata. On the other hand, the short-term and income fund categories are largely unexplored. Only HDFC and HSBC Mutual Funds have such plans in these two categories.

However, in case of HSBC, the reason for the two separate institutional funds is quite different. When HSBC launched its fund in November 2002, there were no separate institutional funds in the market. But the AMC was keen to launch separate funds for institutional clients with lower expense ratios and got the approval from SEBI. "However, later on, other AMCs launched institutional funds as plans within their existing funds, with lower expense ratios. This gives advantage in terms of size, and therefore, we decided to launch institutional plans within our existing funds," said Sanjay Prakash, CEO, HSBC Asset Management. One cause for concern for investors is that many AMCs don't maintain a separate portfolio of these variants of institutional plans. Instead, they are just like an additional plan having the same portfolio as that of the retail plan. Moreover, most of them don't even disclose as to how much of assets institutional plan accounts for in the overall portfolio.

Though this gives advantage in terms of size, it may hamper the interest of retail investors in case the fund sees heavy redemption (or for that matter heavy investment) by big investors. While a few funds like Templeton India Income Builder and Magnum Income have a separate portfolio for institutional plans, most AMCs clubbed together the portfolios. Thus, even if funds maintain the same portfolio, more transparency in terms of disclosure is expected from the fund houses. Are you listening?