Indian mutual fund investors are paying an average cost as expense ratio when compared to global funds. In a Biennial Morningstar Study it has been established that India’s Fees and Expenses Grade Remains Consistent at ‘Average’ for the mutual fund investors. India’s Fees and Expenses grade remains consistent at Average, the same as in the last study. In the 2019 study, India’s grade improved to Average, from Below Average in 2017.
These are as per the findings of the recently launched Global Investor Experience Study by Morningstar. The Global Investor Experience Study is structured around three ‘chapters’:
- Fees and Expenses
- Disclosure
- Regulation and Taxation
Few key findings of the study with regards to India
India continues to enjoy higher grade than several developed European and Asian markets. Investor-friendly regulations, like the ban on front loads, up-front commissions and overall reduction in Total Expense Ratios (TERs) capping investment charges, contribute positively to the country’s grade.
The Average grade is driven by the combination of a globally competitive and relatively lower asset-weighted median of 0.36% for fixed-income funds, which reflects traction in commission free share classes, and relatively higher asset-weighted medians of 1.74% and 1.78% for allocation and equity funds, respectively.
The Asset-weighted median fees for fixed-income funds remain among the cheapest in the world.
India is one of four countries (Australia, the Netherlands and the UK being the others), where initial charges (front loads) are banned, while usage of initial charges remains high in some parts of Europe and Asia.
India’s relatively higher asset-weighted medians TERs in Indian equity funds and allocation funds are primarily driven by the fact that majority investors prefer the services of mutual fund distributors and thus invest through a commission-embedded plan.
India largely follows the bundled expense ratio structure with commissions embedded into the expense ratios of funds. Investors do not incur any additional costs such as advisory fees, platform fees, or front-end loads when purchasing distributor share classes.
Unbundled share classes (Direct plans) assets are rising gradually as investors benefit from the lower expense ratios compared with distributor share classes. Direct plans also have low investment minimums equivalent to those of the distributor share class, thus making direct plans accessible to all investors. Expense ratios for direct share classes are significantly lower and comparable to global non-advice-fee-embedded share classes.