India’s market regulator SEBI is planning to allow a new category of mutual fund schemes where the fees of mutual fund managers will be partially linked to performance. SEBI wants to allow them to charge extra. A fund that consistently outperforms the relevant benchmark index and delivers the highest annualized returns as per SEBI norms. But the proposal to impose performance linked charges on select mutual fund schemes has not been reported earlier.

According to sources, the base fee currently charged for mutual funds will be reduced and the additional fee will be based on performance. SEBI is considering this proposal as it is observed that many actively managed funds fail to outperform their benchmark index. Therefore, the option of additional charges can act as an incentive for the fund to generate better returns. Past performance will be used to decide whether a fund has outperformed the chosen benchmark or not.

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Proposal sent to mutual fund panel

According to the source, the proposal has been sent to SEBI’s Mutual Fund panel for implementation. Because usually such proposals are sent to an internal panel for deliberations, followed by public feedback and then a final decision is taken by SEBI. The proposed changes are part of a comprehensive review of fees that India’s 39.46 trillion rupees ($480.26 billion) asset management industry currently charges its investors.

SEBI Chairperson Madhabi Puri Buch had said on March 28 that there was a need for clarification on the charges levied by mutual funds. Currently, Indian asset management companies are allowed to charge a fee called total expense ratio, which ranges from 0-2.25% of the investment amount. The fee includes all the costs associated with managing the fund.

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When will the additional fee be charged from the investors?

In order to attract more investors to invest in mutual fund schemes from Tier-2 and Tier-3 cities of India, the regulator also allows fund houses to charge additional fees for marketing and to engage intermediaries. During the inspection of 44 asset managers in India, SEBI found instances of misconduct including incentive fees by different funds on the same investor. To curb this, SEBI will allow additional charges only when an investor is buying a mutual fund for the first time.