The Securities and Exchange Board of India (SEBI), the regulator of the country’s securities market, is contemplating a proposal to allow mutual funds to charge performance-based fees to their clients. This move is aimed at aligning the interests of the fund managers with those of the investors.
Currently, mutual funds in India can only charge an asset-based fee that is calculated as a percentage of the assets under management (AUM). However, the proposed changes would allow fund managers to charge fees that are based on their performance in generating returns for their clients.
According to a recent report by Mint, SEBI has been considering this proposal for quite some time, and the regulator is now looking to make some concrete changes to the mutual fund regulations. The move is part of a larger effort by the regulator to bring about transparency and accountability in the mutual fund industry.
The proposal has received mixed reactions from industry experts, with some supporting it while others are cautious about its implementation. Those in favor of performance-based fees argue that it would incentivize fund managers to deliver better returns for their clients, which would, in turn, attract more investors to the mutual fund industry.
Proponents of the proposal also point out that performance-based fees are common in developed markets such as the US and Europe, where they have been successful in aligning the interests of the fund managers with those of the investors. Additionally, it is argued that such fees would make the industry more competitive, as only those fund managers who consistently deliver good returns would be able to charge higher fees.
However, critics of the proposal argue that it could lead to conflicts of interest, as fund managers might be incentivized to take on more risk in order to generate higher returns and charge higher fees. This could, in turn, expose investors to more risks, particularly in volatile markets.
Additionally, some experts are concerned that performance-based fees could be difficult to implement in India’s mutual fund industry, as there are currently no standardized benchmarks for measuring performance across all asset classes. Furthermore, the complexity and cost of establishing such benchmarks could limit their effectiveness. Ultimately, while performance-based fees are an attractive option for investors, they may not be realistic or practical in the Indian market. Therefore, it is important to weigh the potential benefits against the costs before making any decisions.
SEBI is reportedly taking these concerns into account and is said to be working on a framework that would address these issues. The regulator is also likely to consult with industry stakeholders before making any final decision on the matter.
If the proposal is implemented, it could have a significant impact on India’s mutual fund industry, which has been growing at a rapid pace in recent years. According to the Association of Mutual Funds in India (AMFI), the industry’s AUM reached a record high of Rs 35.04 lakh crore ($474.8 billion) in February 2021.
The introduction of performance-based fees could also lead to increased competition in the industry, with fund managers vying to deliver better returns for their clients in order to charge higher fees. This could ultimately benefit investors, who would have access to a wider range of investment options and better returns on their investments.
In conclusion, SEBI’s proposal to allow performance-based fees for mutual funds is a significant development that could have far-reaching implications for India’s mutual fund industry. While there are concerns about its implementation, the proposal has the potential to bring about much-needed transparency and accountability in the industry, while also incentivizing fund managers to deliver better returns for their clients. It remains to be seen how the proposal will be received by the industry and whether it will be implemented in the near future.
