For some time now, I have been trying to maintain a watch list of the most expensive plans among income funds. While expenses matter regardless of fund category, in the case of income funds they have a more consistent and harder impact (than, say, in the case of equity or balanced funds). Much more often than not, higher expenses lead to low returns or higher risk or both.
While pursuing this objective, one of my most striking observations has been that the plans that I consider to be excessively expensive, account for a large chunk of the AUM in the category. If I go by last quarter’s AAUM data, then 69% of the money invested in regular plans (i.e. other than direct) of income funds (other than liquid funds and pure debt fixed maturity plans) was allocated to plans that I consider to be excessively expensive. This could mean one of two things: either my threshold for expensiveness is too low or most investors in regular plans have been sold plans that are way too expensive. For those who want to explore the truth of the matter, in this post I present a small selection of the income funds on my list. But before we get into the specifics, there are a few things to bear in mind.
Firstly, evaluating and explaining a plan’s expensiveness can be a far more complex exercise than most people realize. In presenting the data in this post, I have opted to keep things simple (some may regard it as an oversimplification). I have limited the scope of my presentation to non-direct plans, and have primarily focussed on each plan’s expense ratio relative to that of peer group schemes. For the purpose, I have grouped schemes into five categories. While I have tried to keep things as objective as possible, in any discussion on expensiveness, some degree of subjectivity/ personal bias is unavoidable.
Secondly, against each scheme that I have listed, I have given the current AUM of its non-direct plans. This is intended to serve two purposes. For one, it tells you how much money stands invested in these expensive plans. Additionally, it can help you better understand a plan’s expensiveness. As a rule of thumb, schemes with larger AUM are expected to have lower expense ratios than schemes with lesser AUM. Similarly, schemes with larger AUM than most of their peer group should ideally have expense ratios that are below the category average.
Thirdly, bear in mind that this is a small selection of schemes from my list. My complete list of excessively expensive plans is too long and complex to be meaningfully presented here. The plans presented below are not necessarily the most expensive ones: they are some of the most expensive ones. They have been handpicked to show how widespread the problem of high expenses is.
Lastly, what you see below is not the ideal way that I would like to present this information. I am compelled to do so because of the constraining ways in which fund houses report expense ratios and AUM data, and because many fund houses frequently change their expense ratios.
Ultra Short Term Schemes
Average Current Expense Ratio: ~0.75%
| Expense Ratio Regular Plan FY 17 |
Current AUM Non-Direct |
|
|---|---|---|
| IDBI Ultra Short Term Fund | 1.40% | 410 cr |
| ICICI Prudential Savings Fund | 1.38% | 7,057 cr |
| SBI Savings Fund | 1.36% | 3,546 cr |
| DHFL Pramerica Low Duration Fund * | 1.24% | 686 cr |
| HDFC Cash Management Fund - Treasury Advantage Plan | 1.13% | 10,768 cr |
With one exception, this category covers all schemes currently classified by Value Research as ‘Ultra Short Term’. Data for expense ratios has been sourced from scheme annual reports, monthly factsheets and third party sources. Data for AUM has been sourced from latest available AAUM disclosures and includes AUM for plans that have been suspended for fresh investments. Schemes whose expense ratios are shaded in yellow have above-average AUM in the category.
* One plan in which fresh sales have been suspended since 2012 but in which there continues to be AUM had an expense ratio of 2.51% in FY 17.
Average Current Expense Ratio: ~0.94%
| Expense Ratio Regular Plan FY 17 | Current AUM Non-Direct | |
|---|---|---|
| HDFC Regular Saving Fund * | 1.79% | 4,517 cr |
| Franklin India Short Term Income Plan | 1.57% | 7,000 cr |
| Sundaram Select Debt Short Term Asset Plan | 1.48% | 307 cr |
| Aditya Birla Sun Life Short Term Opportunities Fund | 1.40% | 4,605 cr |
| IDFC Super Saver Income Fund - Medium Term Plan | 1.31% | 2,057 cr |
| ICICI Prudential Short Term Fund | 1.24% | 6,329 cr |
This category covers all schemes currently classified by Value Research as ‘Short Term’. Data for expense ratios has been sourced from scheme annual reports, monthly factsheets and third party sources. Data for AUM has been sourced from latest available AAUM disclosures and includes AUM for plans that have been suspended for fresh investments. Schemes whose expense ratios are shaded in yellow have above-average AUM in the category.
* (1) The expense ratio of the regular plan of HDFC Regular Savings Fund saw one of the steepest jumps in the category from 1.07% in FY 16 to 1.79% in FY 17. (2) The expense ratio of the direct plan in FY 17 was 1.19% which was higher than the expense ratios of the regular plans of most schemes in the category.
Medium Term/ Long Term/ Dynamic Schemes
Average Current Expense Ratio: ~1.43%
In my opinion, this category as a whole, is somewhat more expensively priced than it should be. By my reckoning, if it were to have been fairly priced, then at this point in time, the average current expense ratio for this category should have been ~1.07% (disclaimer: based on complex calculations, subjective assumptions, and personal bias).
| Expense Ratio Regular Plan FY 17 | Current AUM Non-Direct | |
|---|---|---|
| Sundaram Bond Saver | 2.61% | 120 cr |
| Sundaram Income Plus * | 2.23% | 117 cr |
| Franklin India Income Builder Fund | 2.08% | 872 cr |
| Reliance Income Fund | 2.00% | 499 cr |
| Aditya Birla Sun Life Corporate Bond Fund | 1.97% | 2,947 cr |
| HDFC Income Fund | 1.96% | 1,086 cr |
| HDFC Corporate Debt Opportunities Fund | 1.84% | 10,724 cr |
| Franklin India Corporate Bond Opportunities Fund | 1.83% | 6,237 cr |
With one inclusion, this category covers all schemes currently classified by Value Research as ‘Credit Opportunities’, ‘Income’ and ‘Dynamic Bond’. The inclusion is Sundaram Income Plus which is currently classified by Value Research and Morningstar as ‘Ultra Short Term’. Since its stated benchmark is CRISIL Composite Bond Fund Index, I feel it appropriate to include it in the present category. Data for expense ratios has been sourced from scheme annual reports, monthly factsheets and third party sources. Data for AUM has been sourced from latest available AAUM disclosures and includes AUM for plans that have been suspended for fresh investments. Schemes whose expense ratios are shaded in yellow have above-average AUM in the category.
* (1) Over the last 3 financial years, the expense ratio of the regular plan of Sundaram Income Plus has seen a remarkable level of fluctuation, changing from 2.17% in FY 15 to 0.38% in FY 16 to 2.23% in FY 17. (2) The expense ratio of the direct plan of Sundaram Income Plus in FY 17 was 0.22%. As far as I can make out, the difference between the expense ratios of the regular plan and the direct plan of the scheme was the highest for any pure-debt scheme.
MIP Schemes
Average Current Expense Ratio: ~2.15%
In my opinion, this category as a whole, is way too expensive. Consider this: in the case of many fund houses, if you were to create an MIP-type allocation on your own by investing in their most expensive equity scheme, and their most expensive debt scheme, that would be cheaper than investing in their MIP schemes. By my reckoning, if it were to have been fairly priced, then at this point in time, the average current expense ratio for this category should have been ~1.26% (previous disclaimer applies).
| Expense Ratio Regular Plan FY 17 | Current AUM Non-Direct | |
|---|---|---|
| DSP BlackRock Monthly Income Plan | 2.60% | 447 cr |
| HDFC Monthly Income Plan - Short Term Plan | 2.60% | 322 cr |
| BNP Paribas Monthly Income Plan | 2.59% | 327 cr |
This category covers open end income schemes that allow for marginal equity allocation, and which are targeted at investors seeking regular income. Data for expense ratios has been sourced from scheme annual reports, monthly factsheets and third party sources. Data for AUM has been sourced from latest available AAUM disclosures and includes AUM for plans that have been suspended for fresh investments.
Closed End Income Schemes With Marginal Equity
Average Current Expense Ratio: ~2.31%
In my opinion, this is, by far, the most expensive category of income funds. In terms of asset allocation and return potential, it is similar to the category of MIP schemes. However, the essential running costs of these schemes are less (lesser servicing costs, lower portfolio turnover etc.). As a result, there is a case to say that the average expense ratio in this category should be less than that of MIP schemes. There is also a case to say that the expense ratios of many plans in this category reflect fund house-distributor collusion with the intent of milking investors, at its ugliest. By my reckoning, if this category were to have been fairly priced, then at this point in time, the average current expense ratio should have been no more than 1.26% (previous disclaimer applies).
| Average Expense Ratio Regular Plans FY 17 | Current AUM Non-Direct | |
|---|---|---|
| HDFC Capital Protection Oriented Fund - Series III | 2.69% | 322 cr |
| DHFL Pramerica Hybrid Fixed Term Fund (Multiple Series) | 2.65% | 634 cr |
| Sundaram Hybrid Fund (Multiple Series) | 2.65% | 520 cr |
| Axis Hybrid Fund (Multiple Series) * | 2.53% | 6,474 cr |
| ICICI Prudential Multiple Yield Fund (Multiple Series) | 2.51% | 1,364 cr |
| Kotak Capital Protection Oriented Scheme (Multiple Series) ^^ | 2.44% | 426 cr |
| ICICI Prudential Capital Protection Oriented Fund (Multiple Series) | 2.34% | 3,277 cr |
Data for expense ratios has been sourced from scheme annual reports and third party sources. Data for AUM has been sourced from latest available AAUM disclosures. While compiling the data, only plans that were in existence on the date of compilation i.e. 21 Sep 2017 have been considered.
* 93% of the current AUM of Axis Hybrid Fund has come via associate distributors such as Axis Bank.
^^ As far as I can make out, Kotak Mahindra MF does not follow SEBI directions/ industry practices in reporting plan-wise expense ratios in its annual reports. The expense ratio number given here includes both direct and regular plans. The actual expense ratio for regular plans alone can be assumed to be higher than what is mentioned.
