Indian MF industry scores ‘average’ on fees and expense scorecard

The Rs 39-trillion domestic mutual fund (MF) industry has scored an ‘average’ on Morningstar Inc’s fees and expense scorecard — indicating there is more legroom to bring down the cost of investing in MFs.

In 2019, India’s score improved from ‘below average’ to ‘average’, thanks to investor-friendly regulations introduced by the Securities and Exchange Board of India, such as a ban on entry loads, up-front commissions, and overall reduction in so-called total expense ratios (TERs).

Australia, The Netherlands and the United States are currently in the top-quadrant. The Morningstar study says the TER for India is higher as still a large number of investors prefer services of MF distributors. Meanwhile, the countries that scored better have a commission-free model but investors pay a separate fee for advice.

“As such, India largely follows the bundled expense ratio structure with commissions embedded into the expense ratios of funds. Investors do not incur any additional costs such as advisory fees, platform fees, or front-end loads when purchasing distributor share classes,” says Morningstar.

With rising popularity of ‘direct’ plans and a shift towards a distribution and advisory activities could help India improve its ranking going ahead, said experts.