SEBI likely to scrap incentives linked to small towns for MU funds

MUMBAI: The push by mutual fund houses to collect assets from small towns and villages in the country, which is called Beyond 30 (B30) in industry parlance, is likely to be scrapped by capital market regulator Securities and Exchange Board of India (SEBI). Currently, mutual funds can charge up to 30 basis points above the Total Expense Ratio (TER) on assets sourced from such venues.

Any city or village that does not fall into the so-called T30 category, or the top 30 centers in terms of Assets Under Management (AUM), is part of the B30. B30 incentives were introduced in 2018 to boost penetration of mutual funds in small towns.

According to sources, SEBI is planning to discontinue the B30 incentive and allow a one-time fee for distributors who bring in new investors, irrespective of location. Of course the one time fee will be part of the TER. This may leave some room for fund houses to pay additional incentives to distributors.

This planned move by the regulatory body is taking into consideration the concerns about misuse of the existing structure by distributors to earn more revenue. Because the B30 incentive is paid only in the first year of investment. Some distributors allegedly resort to shifting investors' money from one fund to another every year to continue receiving incentives.

SEBI has conducted a comprehensive study of fees and expenses charged by mutual funds and has discussed these issues with the Mutual Fund Advisory Committee and is understood to have sought views from industry body Association of Mutual Funds in India (AMFI) and individual fund houses.

TER is the total expenditure incurred by the fund house in operating the scheme. However, the 18% GST on expenses incurred while buying and selling securities through mutual fund schemes and fund management fees is outside the ambit of TER. SEBI is considering bringing all these costs under the TER. SEBI has set a limit on how much TER a scheme can charge.

Active equity fund schemes can charge a maximum TER of 2.25 percent of AUM, while debt schemes can charge up to two percent. Market players say that many schemes currently charge lower TERs than the maximum permitted by SEBI, if more heads like GST are brought under the TER, it may encourage fund houses to raise the ratio where space is available.