SEBI moves to end bias against individual investors on expense fees

Capital market watchdog, Securities and Exchange Board of India (SEBI ) has reiterated its reservations over retail investors being charged higher expense fees as compared with what institutions are asked to pay for the same product.

In its recent communication to fund houses, the regulator had expressed displeasure over the practice of mutual funds in giving institutional investors an advantage over retail clients.

Mutual funds offer two versions or plans - institutional and retail - of the same scheme to ensure that the retail investor is spared the pain in case of withdrawal of money by the dominant institution. Though the portfolio of stocks constituting the schemes is the same for both plans, sometimes institutional plans fetch higher returns than retail plans.

The discrepancy arises from the so-called expense ratio covering fund management fees and marketing expenses which is higher for retail plans according to industry professionals.

The regulator disapproves of this practice as it amounts to expenses on institutions being subsidised by retail investors. Mutual funds are barred from charging beyond 2.25 per cent in expenses from investors and in the case of retail plans, fund houses usually charge the full amount whereas institutions get a reduction in management fees and marketing expenses which lowers the expense ratio for them.

According to mutual fund industry watchers, the method of charging expense fees in the industry is similar to that of any other services sector.
They say the cost of selling a scheme to a number of individual investors would naturally be higher than to a small number of wealthy investors and there is therefore, nothing wrong in the differential cost structures.