While the mutual fund industry has reached Rs. 20 lakh crores in assets size and is expected to reach to Rs. 95 lakh crores by 2025 (as per Birla SL MF’s CEO), what does an investor expect?
You and I may have many expectations but one common thing is that we expect them to deliver more for us.
To illustrate with an example, Rs 1 lakh invested today earning an expected returns of 10% year or year, will result in Rs. 6.73 lakhs in 20 years.
Now, if this 10% could become 10.5%, the value at the end of 20 years will be Rs. 7.37 lakhs.
This is 9.5% higher than the value at 10% and, hold your breath, it is 64% of Rs. 1 lakh, your original investment amount.
One of the undisputed ways to add this 0.5% (or any number for that matter) is to bring down the expense ratio and put more money in the hands of the investor.
This is entirely possible, since with rising asset size, the economies of scale get working. The fund house gets a wider asset base to spread most of its fixed expenses. This benefits the investor by providing higher returns as also the fund house, which can still generate a decent profit.
Vanguard Mutual, the largest no load MF in the world, does the same with its passive funds.
A rupee saved is rupee earned, right?
Unfortunately, this is not the reality here in India, at least not completely.
Let me share some findings from numbers that I recently ran through.
I downloaded expense ratio of 1211 mutual fund schemes from April 2016 to June 2017, all direct plans. I measured the change in expense ratios from May 2016 to May 2017 and June 2016 to June 2017.
Why only direct plans? They are less confusing since they consist of fund management and other administration charges only. The regular plan expense, in contrast, has varying commission levels included, making it difficult to analyse.
More so, we are only concerned with the expenses that the fund house can control and can reduce as it increases its asset size.
Of the 1211 schemes, 588 schemes, that is about 36%, lowered their expense ratio from June ’16 to June ’17. Good!
However, in the same period, about 621 schemes or 38.5%, increased their expense ratio. Whoa!
Now, this increase can be as much as 0.01% to 1000%. The small increases may not be so relevant, so we will filter it down further.
Even if we were to remove insignificant increase and only consider, let’s say more than 10%, still about 200 schemes, that is 12% of all, make it to the list. Not a small number!
What is more surprising that this is not limited to just equity funds. More debt funds – where the returns are muted in any case – have seen an increase in expense ratio.
Heard of double whammy!
Let’s go dive into the fund schemes and the change in expense ratio numbers.
Please note that all the % numbers mentioned below are change during that time period. It is not the actual expense ratio but the CHANGE in expense ratio.
Here’s a couple from Birla SL Mutual Fund.
Birla’s MIPs which had a sort of a dream run, kept varying their expense ratio in the range of 0.6 to 1.28 in various periods last year. Not sure, what can make expense ratios play such a yo-yo, considering this is only a direct plan. Currently, the expense ratio is on the higher side of the observed range.
Let’s move to HDFC Mutual Fund. As it appears, HDFC MF used the debt funds to the hilt to add to its bottomline. The expense ratio of the debt funds has increased substantially.
In the HDFC Floating Rate Income Fund – Long Term Plan, the expenses are up 110% from June 2016 to June 2017.
Other debt funds too have undergone increase. See this table below.
In case of Franklin India MF, some of its debt and equity funds saw substantial jump in expense ratio. Franklin MF’s Cash Management Account has witnessed a 73% increase in its expense ratio (June to June). Its Income Opportunities Fund too jacked up expenses by 80.4%.
The Franklin India High Growth Cos Fund has been a darling of investors for some time. No doubt the fund has used the increased AUM along with the higher expense ratio to jack up its own bottomline too.
The international feeder fund – Franklin European Growth Fund too saw quite an increase. In fact, most international funds in the Indian Fund industry saw increase in expense ratio. See one further with ICICI MF – US Bluechip Equity fund.
Now, look at some of the funds from ICICI Prudential. The Business cycle fund seems to be turning quite in favour of the fund house – expense ratio more than doubled over the year.
Its ICICI Exports and Other Services Fund too has been a favourite with returns chasing investors. No doubt the fund house has used the funds expense ratio to fuel its own bottomline.
The surprising entry is that of the Nifty Next 50 index fund. It’s expense ratio was 0.55% in March 2016 to 0.29% in April 2016 and back to 0.42% now.
An index fund is assumed to have a low expense ratio and expected to go lower. This is quite the opposite. What is also interesting to note is that the fund house decreased the ratio in the first 3 months of the last financial year, only to increase it again.
The debt funds too haven’t been spared.
Some of ICICI MF’s FMPs and Capital protection funds (not mentioned here) have seen doubling of their expense ratios.
You have to note this commentary in the background that ICICI has now gone to become the largest fund house in the country by asset size.
IDFC MF too hasn’t left itself behind in taking a dip in the market led returns.
IDFC MF has increased expenses across Debt and Equity. While IDFC Equity fund now charges 81.3% more than an year ago, IDFC Ultra Short Term about 69% more and IDFC Money Manager about 61% more.
Kotak MF’s all debt funds surprisingly have gone for the kill. Is there too much competition on the equity side?
SBI MF’s increase in expense ratio is nothing of an alarm as such but goes against expectations.
Note that SBI Small & Midcap Fund stopped taking subscriptions or new investments long back. You can only redeem not add.
Tata MF’s more popular funds too have seen an increase in expense ratio.
Finally, UTI MF’s debt funds see an increase.
Frankly, the expense ratio looks like an ugly puzzle.
Expense ratios seem to work more at the whims and fancies of the fund houses. They decrease at one point and increase at another.
The larger the fund house, more extraction it does from its asset size. For example, HDFC and ICICI.
Debt funds haven’t been spared too. The bane of lower returns is further hurt by a higher expense ratio. See the table below of liquid fund and the change in expense ratios:
Now, if you look at a standalone expense ratio of a liquid fund, nothing seems alarming. For example, Mirae Cash Management fund’s expense ratio in May 2016 was reported as 0.02%, which more than doubled to 0.05% in May 2017. It is currently at 0.04%.
As an absolute number, it doesn’t hurt at all. Look at the relative change and you know what’s going on.
Make hay while the sun shines
In the final assessment, what appears is that most fund houses don’t operate on the principle of “share more with the investors“. They clearly want their pound of the flesh.
Specially, when the mutual fund investments are enjoying higher than normal returns pushed by a bull market 9for equity) and falling interest rates and thus higher returns (for debt funds).
What will happen when the tide turns? It remains to be seen.
Between you and me: How much attention do you pay to the expense ratio? Which fund house in your assessment is fair to its investors and shares more as and when possible. Which one is the Vanguard of India, if any?