Sebi: Do small mutual fund investors subsidise large ones?

Mumbai: Markets regulator Sebi suspects that in the race to garner a larger amount of assets under management (AUM), some fund houses may be charging their institutional clients lower fees than what they charge their retail investors. Sebi has sent a mail to all mutual fund houses, enquiring how they fix charges for fund management, marketing, distributor commission, etc.

Together, these are called the total expense ratio, or TER in industry parlance. Sources said the regulator is looking to stop the practice of small investors subsidising institutional investors.

In its mail, Sebi has asked fund houses to explain in detail how they fix the TER, who fixes how much TER is to be charged to the schemes, how fund houses — on a daily basis — calculate this expense for each scheme, and the reasons for any change in it.

The regulator also wanted to know from each of the fund houses as to who was the approving authority in case it wanted to change the TER. It also wanted to know that if a fund house wanted to change the TER on any particular day, were all its investors informed before or after the change.

Tuesday was the last day for all the fund houses to reply to Sebi's mail. As of now, under Sebi rules, fund houses can charge investors up to 2.85% of the invested amount per year. However, depending upon the category and size of the schemes, this charge varies substantially.

Equity funds have the leeway to charge higher fees while charges for exchange-traded funds ( ETFs) are just a few basis points (100 basis points = 1%). Again, charges in pure debt funds are higher compared to liquid funds where the amount is just a few basis points.