SEBI Moots Mutual Funds with Performance-Based Fees

Markets regular the Securities and Exchange Board of India (SEBI) may give a green signal to a new category of mutual funds in which the charges of asset manager will be linked, in a partial manner, to the performance of funds.

SEBI is mulling over the idea to allow additional charges if a mutual fund outperforms a particular benchmark index on a consistent basis while offering higher annualised returns. Currently, the plan is in the works with the internal panel of SEBI. 

The core idea is that the base fees, which are charged for mutual funds, are likely to be reduced and additional charges would be as per the performance. At the moment, there are no such performance-linked mutual funds in India.

The country would emerge as one of the few major markets to introduce performance-linked fees for mutual funds.

One of the key reasons to introduce this move has been that several actively-managed funds have been failing to outperform their benchmark index.

It is expected that the move could act as an incentive for funds to offer better returns.

The historical performance will most likely be considered as an indicator to gauge whether a fund has performed better than the chosen benchmark. However, an official statement on the proposal is awaited from SEBI in this regard.

The mutual fund panel of SEBI is looking into the nitty-gritty of the implementation of the scheme. After the internal panel gives its verdict, feedback from the public will be sought and it is only after this that SEBI will go ahead with the move. 

Currently, asset management companies (AMCs) or funds houses are allowed to levy charges referred to as total expense ratio, which range from 0-2.25% of the investment amount. It includes the total costs that are related to managing the fund.

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