SEBI's risky gambit: Performance-linked fees set to shake up mutual funds industry!

SEBI explores performance-linked fees for mutual funds to boost performance, align fees with results, and enhance investor returns. Industry concerns and potential impact await resolution.

Performance-linked mutual funds
  • SEBI’s proposal can see the linking of mutual fund performance and fees charged.

  • This is seen as a debatable move by experts with opinions for and against it.

  • Changes like these are a normal part of the evolution process, and how well it gets implemented is what matters. 

In the world of mutual funds, where performance and fees have always been closely scrutinised, a groundbreaking development is on the horizon. Paying mutual fund fees when your fund is performing poorly might feel unjust, and it seems that the Securities and Exchange Board of India (SEBI) shares a similar sentiment. As investors keep a close watch on mutual fund news, SEBI's contemplation of introducing performance-linked fees signifies a potential paradigm shift. 

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Performance linked mutual fund fees

SEBI is looking at the possibility of introducing a performance-linked incentive scheme in mutual funds. The body will come up with a consultative paper that seeks to link performance and design an incentive structure to support the proposal.

If this plan is formalised, SEBI will allow the creation of a new fund category where the fund management charges will partly be linked to performance. Part of the proposal also indicates that if a fund exceeds its benchmark index consistently, SEBI will allow the levy of additional charges. 

MF analysis: Is it a good initiative?

Introducing performance-linked incentives in mutual funds is poised to drive improved performance and foster a sense of meritocracy. By establishing a direct connection between performance and fees, this initiative benefits both fund managers and investors, addressing the current discrepancy where fees appear detached from the actual performance of mutual fund schemes.

On the flip side, there are structural issues in the mutual fund industry due to which many schemes fail to mimic their benchmarks adequately. These issues include the use of a total return index in lieu of the regular benchmark and the mandate for schemes to invest within a specific universe. The introduction of a performance-linked scheme doesn’t address these issues.

Experts, like the Managing Director of Kotak Mutual Fund, Nilesh Shah has pointed out that consideration must be given to limitations that fund houses face while offering the incentives. Fund houses maintain a 5% cash for daily liquidity that leads to a drag of 35 basis points. Besides, there is a 10% cap on individual stocks, which is not applicable in indices that can give higher weightage to individual stocks.  

Also Read: New guideline by SEBIUse your e-wallet when investing in mutual funds to be KYC compliant

The Bottom Line

The performance linked mutual fund plan is part of a natural progression in the mutual fund industry. It remains to be seen if this will motivate fund houses to deliver better mutual fund results.

Related:  Why is SEBI unhappy with mutual funds?





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