The Securities and Exchange Board of India (Sebi) could give permission for a new category of mutual funds that where asset managers’ charges will be partly linked to the performance of funds.
An official document reviewed by news agency Reuters and a source directly familiar with the matter indicates that Sebi is considering the proposal.
The market regulator wants to allow additional charges if a fund consistently outperforms a relevant benchmark index and gives higher annualized returns, as per the internal document.
As per the plan, the base fees currently charged for mutual funds would be reduced and additional charges would be based on performance. No such performance-linked mutual funds exist in India.
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If it is introduced, the country would become one of the few major markets to welcome performance-linked fees for mutual funds.
“The regulator is considering this proposal since it has observed that many actively managed funds fail to beat their benchmark index,” the source was quoted as saying by Reuters.
“An option for additional charges could act as an incentive for funds to give better returns,” the source added.
It may be noted that past performance will be used as an indicator to judge whether a fund has performed better than the chosen benchmark. Sebi is yet to issue an official statement on the proposal.
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The proposal has been referred to Sebi’s mutual fund panel to work out implementation, according to the source. Such proposals are usually sent to internal panels for deliberation, following which public feedback is sought and then Sebi takes a final call.
The proposed changes are part of a comprehensive review of fees that India’s vast asset management industry currently charges from its investors. On March 28, Sebi chairperson Madhabi Puri Buch said there is a need for transparency on charges levied by mutual funds.
In the present setup, asset management companies are allowed to levy charges called Total Expense Ratio, which range from 0-2.25 per cent of the investment amount. The fee includes the total costs associated with managing the fund.
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