I attended a talk by Sandesh Kirkire, CEO of Kotak Mutual fund yesterday. The most important point he made during the talk was about the impact of the proposed new regulations coming out of the recent mutual fund industry-regulator deliberations. Before he got to that, he made a few comments on the market that were decidedly downbeat. They reflected a long-standing frustration that the industry leaders seem to have with UPA-II – stalled reforms, halting progress on infrastructure development, inability to control the slide of rupee, unwillingness to reign in deficit, and so on. In the medium term, he sees the stock market trading in range, and the interest rates remain static with a possibility of downward movement in 6-9 months.
Regarding the mutual fund regulations, the important point that he made was with respect to the proposed Total expense ratio hike. He believes that this will have little impact on the AMCs – either profitability or its ability to increase pay-out to distributors – since this would be combined with a new constraint on exit loads. Thus far, exit loads collected from investors (who exit early) were going to the AMC account from where they are free to spend as they wish (add it to their balance sheet or pay out distributors for sales). Going forward, the proposal states that this money will need to be put back in the scheme account which means it will contribute to the NAV of the scheme and will not accrue to the AMC.
What does this mean? It means that, for the investor, the negative impact caused by the increase in TER would be partially offset by the flow-back of exit load into the scheme coffers. Sandesh thinks that this would be a total wash – that the exit load will fully compensate the loss incurred by the 25 bps increase in TER. He cited a regulator/industry study to back his claim but I will have to see more details to be convinced about this.
(For distributors, it would mean that upfront fees – which were coming primarily off exit loads – will go down, or come with a “claw-back” clause)
Hopefully SEBI will come out with some clarity soon to put speculations to rest.