Mutual Fund News : SEBI Intends to Allow Mutual Funds with Performance-Based Fees

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Securities Exchange Board of India (SEBI), the market regulator, is considering to allow a new category of mutual funds in which the fees of the asset manager will be partially correlated with the performance of the funds.

The fundamental tenet is that the base fees, which are charged for mutual funds, are likely to be reduced and additional charges would be applicable as per the performance. In simple words, SEBI intends to permit this additional fee, when a fund consistently beats the pertinent benchmark index and produces higher annualised returns.

Given the observation that numerous actively managed funds fall short of outperforming their particular benchmark indices, the market regulator has thought of this move. Additionally, the option of performance-based fees, which enables additional charges will act as an incentive for funds and generate better returns.

Currently, Asset Management Companies (AMCs) are allowed to impose fees in the form of expense ratio, which includes the total costs associated with managing the fund. The expense ratios may range from 0 – 2.25% of the investment amount.

The SEBI’s mutual fund panel has been tasked with developing the implementation of the aforementioned proposal to allow mutual funds to impose performance-based fees. Given that India will be among the few significant markets to implement performance-based fees for mutual funds if this is approved. However, SEBI has not yet made this official.