Commission based business is self killing.
Let’s take an example: Mutual Fund: SBI Blue Chip – Direct Plan. Expense Ratio 2.5%
Expense ratio can be otherwise termed as fees or commission charged by mutual fund to it’s contributors. The way it works is Funds perform in market and have certain mark to market Gross value. Fund house then charge fees on these funds and get net value. NAV is calculated based on net value.
NAV = (Fund performance Gross value – Fees, expense etc) Total number of units.
So if an Investor “A” contributes has current contribution of 10,000 Rs and hence pays 2.5% i.e. 250 Rs towards expense.
Another investor “B” contributes 10,00,000 Rs then he pays 2.5% i.e. 25,000 Rs towards expenses.
In my view there is extra work perhaps that was needed by managing larger fund. But was it directly proportional to amount invested. We have largely seen as fund sizes grow up there expense ratio (percentage) falls down. In fact there is perception and fund manager have neglected large funds and eventual performance declined (will research and put in another post in future).
I think this all pay same ratio is more of socialist way of thinking. Fee normally includes administrative, account management fee and profit sharing fee. So how is it fare for large investor to pay bigger admi fee for his single folio compared too much smaller fee by smaller investor? Isn’t this Take money from Peter to subsidies against Paul’s expenses? This is one of the behaviors high value investor start seeing more value in direct stock investment. Had the Expense ratio’s in India been o.2% it would have been perhaps no issue with 2.5% this difference is too big to ignore.
True source of expense (or near about true) should be identified and expenses should be on that. Entry load and exit loads were good but then they were [percentage based too no reflecting actual efforts for executing those transaction.
Here is what I think should happen.
Fixed Transaction Cost: There should be fixed fee in Rs not in percentages for each transaction and investor should pay this separately. Sip should have lower transaction cost since transactions are repetitive and in today’s word mostly automated. Someone who keeps buying and selling fund should pay for this.
Fund Management fee: There should be fixed fee for managing fund Irrespective of size. This should factor in fixed cost AMC expects. In fact there should be incentive for high value investor on this.
Expense ratio: % Fee charged on funds much lower ratio should be charged on fun.
This is pretty much seemed to be the model in most developed countries. This keep cost of Staying invested in mutual fund low and investor even high net worth will stick around with god funds. This will reduce MF hoarding behavior too since it would be beneficial to stick with fewer funds.
Is there a market for such rational fee structure in India?