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Posted by: Uma Shashikant on Thu, Jul 29th, 2010

NFO and MF Expenses - Gazette Notification of 29 July 2010

The Gazette Notification bringing about amendments to the SEBI (Mutual funds) Regulation was notified on July 29, 2010 and re-issued in a circular on August 6, 2010The notification brings to effect two major changes that have earlier been proposed by Sebi.

 

The first pertains to NFOs:



  • The offering period for all NFOs, except equity linked savings schemes cannot be more than 15 days (reduced from 45 days).
  • Any refund of subscription money to investors will have to be done in 5 working days from the close of subscriptions (reduced from 6 weeks).
  • Statement of account to all investors whose subscription has been accepted should be issued within 5 working days from the close of subscriptions (reduced from 30 days).

 

The above changes apply to all NFOs going forward and will demand higher efficiencies from fund houses, banks and R&T agents in processing NFO subscriptions.

 

The second pertains to mutual fund expenses:


Regulation 52(6) pertaining to mutual fund expenses has been completely replaced, more to provide clarity, but the key change is in the expenses of fund of fund (FoF) schemes. Earlier FoFs could charge 0.75% as expenses, and this was interpreted to mean 0.75% over and above the expenses of the underlying schemes in which a FoF invested. A new Regulation 52(6)a  provides the following choice to FoFs:

 

- Charge 0.75% as an all inclusive fee

-  Or charge 0.75% as maximum investment management fee, administrative and other expenses, and weighted average of the expenses of the underlying schemes, provided the total expenses charged under all heads does not exceed 2.5% of the weighted average net assets of the scheme.

 

The FoF segment is not so big as to create a ripple, but considering that feeder funds and FoFs are being used in several international products, the profitability of the structure depends on its ability to negotiate a separate plan with a lower expense ratio (not over 1.75%) from the underlying funds. This could be infeasible in an open-architecture design, where FoFs  independently choose the underlying funds, and therefore are unable to commit their funds to any specific scheme or plan. In a FoF structure made up of in-house funds, the second option makes regulatory sense, as it restricts the ability of the fund house to claim more expenses for bunching together its own funds. However, such in-house FoFs can exercise the first option, and simply charge 0.75% on the FoF, while continuing to charge expenses on the underlying funds, as usual. 

 

The amendment to the expense structure in a FoF thus implies lower profitability for open architecture FoF structures, compared to in-house FoFs.

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