Can A Performance-Based Fee Improve MF Outcomes?

The idea of performance fee in mutual funds is to align managers’ interest with investors If the new performance fee is in place, there is always a possibility of fund manager taking excessive risk

Do you think that fund houses have been unfair in charging management and distribution fees even when your mutual fund (MF) portfolio is not performing well? Fret not. The Securities and Exchange Board of India (Sebi) has taken note of your concerns.

The market regulator had in December initiated a detailed study on existing policies pertaining to expense ratios of fund houses. Currently, the total expense ratio (TER), which includes management fee and other expenses, is charged from investors on a daily basis, irrespective of whether a scheme is performing well or not.

Now, media reports suggest that Sebi may allow a new MF category where managers‘ fees are tied to performance. It is expected that the base fees would be reduced, and any additional fees would depend on the portfolio performing better than the benchmark. This would make India one of the few markets with such fees. Currently, 88% of actively managed funds, such as large-cap equity funds, underperformed the S&P BSE 100 in the year ended December. So, what remains to be seen is whether the new category can help improve the industry’s transparency and investor outcomes.