MFs aren't game yet for capital protection funds
It could be a while before asset management companies line up to file for capital protection schemes, which have been recently approved by the Securities and Exchange Board of India (Sebi).
By Gaurav Pai, TNN |
MUMBAI: It could be a while before asset management companies line up to file for capital protection schemes, which have been recently approved by the Securities and Exchange Board of India (Sebi).
The regulator has laid down the preliminary set of regulations for capital protection funds, but no reference has been made to the fee that could be charged by AMCs for such schemes.
Industry watchers say since such funds are much more complex than plain-vanilla debt or equity funds, AMCs are likely to charge much more. How much more they will charge and whether it will affect an investor’s returns is not yet clear.
Capital protection funds have to be compulsorily closed-ended as per Sebi norms and cannot assure any returns. The investor, however, is assured of his capital on maturity even if the fund underperforms.
Capital protection alone may not draw investors to the product. After all, bank fixed deposits also assure safety of capital. “For an AMC, the expenses on the capital protected funds are not strictly comparable to plain vanilla funds although they are surely linked. Worldwide, capital protected funds charge a higher expense ratio and the same trend may be witnessed in India though the difference may only be nominal,” says Mata Securities, national head (mutual funds), Sameer Kamdar.
He says it is too early to say whether these will hurt investor returns. The Sebi order had said the mutual fund portfolio under the scheme must be rated by a Sebi-registered credit rating agency. For the voluntary grading of IPOs, Sebi’s investor protection fund was to foot the bill.
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For capital protection funds, AMCs will have to bear the costs. Welcoming the move for getting capital protection schemes rated, Crisil chief ratings officer Roopa Kudva says, “AMCs paying for ratings is the practice worldwide.”
“Although this will be one of the expenditures in managing the fund, it will not be a significant expense for the fund,” she adds.
Principal PNB Mutual Fund head (fixed income) Sandeep Bagla says, “These (capital protection) products are likely to be priced at competitive rates in line with the charges currently levied by hybrid schemes. These funds are likely to charge expenses somewhere between those charged by pure debt and pure equity products.”
Fixed income schemes charge around 1% of the assets invested as management fees, while equity funds charge around 2-2.5% on an average. Industry watchers said pricing of these funds will be key. As all mutual funds are still in the process of structuring their capital protection funds, no specific figures are available on the fees for managing them.
“I don’t foresee AMCs charging higher fees,” says JM Financial Mutual Fund CEO Jimmy Patel. “Depending on the risk appetite of the customer, even a FMP can be classified under the protection category of schemes where the fee structure is very minuscule.”
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