February 08, 2018

Three Cheers For SEBI!

Over the past few days, SEBI has released a series of directives to fund houses that are aimed at rationalizing the expense ratios of mutual fund schemes, and enforcing greater transparency in their disclosure. This is a short post to applaud SEBI’s recent moves, and to talk a bit about what these mean for investors.

First, some background to explain the magnitude of the problem that SEBI was trying to solve.  Over the years, a number of fund houses have been pushing the limits on what they can charge investors in their schemes, without arousing any suspicion.  On this blog itself, I have spotlighted multiple instances of fund houses ripping off their investors (see here, here and here).  A lot of this was possible because these fund houses made it difficult for investors to figure out what they were being charged, let alone if they were being fleeced or not.  In a study of fund house websites and monthly fact sheets that I had done around three years ago, I noted that nearly all the large fund houses had questionable disclosure standards related to expense ratios (see here).  Little has improved since then.

While entities such as Morningstar and Value Research have also been reporting numbers across schemes, and across fund houses, the accuracy of their numbers is often in question.  As a result, the most reliable sources for expense ratios, thus far, have been the scheme annual reports.  But even these have their limitations.  Firstly extracting and comparing information from the annual reports is a challenge.  Secondly, annual reports do not reflect the expense ratio changes that happen during the year (in many instances, the changes are very frequent, and significant).  Thirdly, the annual reports are too dense to be easily scrutinised.  At least, that’s the only reason I can think of, for a fund house like Kotak Mahindra MF to get away without separately disclosing the expense ratios of its direct and regular plans in its annual reports.  Long story short, it was a mess.  With SEBI’s latest directives, hopefully, all of this will be a thing of the past.  Here’s how I see its moves benefitting investors.

You’ll be able to make clearer comparisons across schemes
SEBI has stipulated a format that all mutual funds have to adhere to.  The well-thought-out format requires fund houses to separately mention the base expense ratio for each scheme plan, the additional expenses, and the taxes.  Moreover, the information is required to be put on a spreadsheet that can be downloaded from the fund house’s website.  This will make it easier to extract this information, and to compare information across schemes. 

Expense ratios will be available daily
That’s right: not annually, not monthly- SEBI’s directive requires the information to be disclosed daily.  This would be particularly useful for prospective investors in liquid and ultra short term funds.

You’ll be able to clearly see changes in expense ratios
SEBI’s format requires that, going forward, the daily historical expense ratios across all schemes be available in a single spreadsheet.  Thus, you will be able to quickly and easily examine the historical changes in the expense ratio of any scheme.  Such a disclosure can also be expected to act as a deterrent against fund houses frequently tinkering with the expense ratios.

You’ll be alerted about changes in expense ratios
In yet another path-breaking move, SEBI has directed fund houses to intimate investors via email or SMS of any change in the base expense ratio of any scheme that they have invested into.  This intimation has to happen at least three working days prior to affecting the change.

Your expense ratios could come down
Apart from the indirect impact of competition that the abovementioned transparency measures might bring about, SEBI has forced fund houses to cut down on some dubious charges.  If my calculations are correct, the expenses could come down by up to 0.59% p.a. (the exact number would vary from scheme to scheme).

Call me biased or na├»ve if you like, but I am delighted by the way in which the current leadership and team at SEBI are tackling some of the key issues related to mutual funds.   I look forward to even better days for mutual fund investors.

Next ➡ ⬅ Previous