Mutual Fund Expense Ratio: How much is fair?
Worldwide, there is a lot of hue and cry over high expense ratio that investment management firms charge for generating better than market return. Globally, funds are moving out of active strategies to low cost passive investing. The logic for these flows is often cited that value addition done by active mutual funds is small and uncertain vs the fees charged by them.
Talking in the Indian Context, The Securities and Exchange Board of India (SEBI) wants to review whether Indian mutual funds are overcharging their customers by imposing a high total expense ratio (TER).
In another report by Morningstar, a mutual fund advisory, said that India was among the most expensive markets when it comes to expense ratios.
In Mint newspaper, some industry leaders opine expense ratio must be looked in context of maturity of markets and/or outperformance of the scheme.
Nilesh Shah, Managing Director, Kotak Asset Management Co. Ltd comments, “Mutual funds should be allowed to link fees with performance. It is a win-win situation for investors and fund houses as performance gets incentivised. However, there should be appropriate checks and balances.”
Radhika Gupta CEO, Edelweiss Asset Management Ltd. comments, “The ‘right expense ratio’ is one that is fair to an investor, given the value that is being delivered by the asset manager”
At Moneyworks4me.com, we second his opinion that better performance rewards investors and investment managers. This is in lines with Economics 101, which says higher value addition deserves a higher pricing. So as a fiduciary how do one actually find this?
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