The Curious Case Of MF Expense Ratio In India

In an interesting development in the global mutual fund industry, Fidelity Investments launched a mutual fund scheme with zero expenses for retail investors in the US. In India, it is inconceivable bringing such a product into the market as expense ratio remains a bone of contention between the regulator and the MF industry, both having their own perception about the desirable level of expense ratio. This is reflected in the two contradictory commentaries last week on expense ratios in India. 

In one of his speeches, U K Sinha, former chairman of the Securities and Exchange Board of India (SEBI), recently said that India’s asset management industry remains one of the most expensive globally and there is scope for bringing down the cost of investing. Yet, in another report by Federation of Independent Financial Advisors (FIFA), a study of 25 countries has shown that India is the third least expensive to own equity mutual funds. The average equity expense ratio in India was 1.88 per cent at the end of March 2017, which is just behind Norway’s 1.80 per cent and Japan’s 1.87 per cent. The average expense ratio for all the 25 countries was 2.15 per cent. A study by Morningstar Global Fund Investor Experience Report 2017 ranked India as the tenth least expensive country with its expense ratio being below the global average. 

The jury may be still out on whether expense ratio in India is high or low. The reason why expense ratio is heavily discussed publicly because it has a direct bearing on the returns to the investors. If everything remains constant, a higher expense ratio means lower returns. The regulator is doing its part to bring down the expense ratio and in one of its past initiatives, every fund was directed to offer ‘direct’ and ‘regular’ fund from 2013. The difference between the two is the expense ratio. The ‘direct’ fund has lower expense ratio because it does not involve any commission to brokers or distributors. 

Notwithstanding the conflicting contentions, expense ratio remains only a part of the bunch of quantitative and qualitative parameters that need to be analysed before picking up a fund for investment.