Why Mutual Fund Investment Will Become Cheaper: 5 New Rules That May Impact You

From tightening of norms on stocks and shortening of the time between a public offer and listing of shares, to reduction in fee charged by mutual funds from investors, market regulator Securities and Exchange Board of India (Sebi) on Tuesday announced a spree of changes in rules. The reform measures, announced by the regulator after a quarterly board meeting, came after weeks of fund outflow-related concerns raised by market participants, amid soaring crude oil prices and battered emerging market currencies such as the rupee.

Here are five of the changes announced by Sebi that may impact you:

1. Mutual fund fees

Sebi told mutual funds to cut fees charged from investors. The mutual fund industry would have to adopt the full-trail model of commission in all schemes, according to the regulator. In other words, this would make it cheaper for the public to invest in mutual funds. Investment in mutual funds involves expenses related to costs incurred by an institution in managing the fund.

Analysts say this is expected to benefit the investor in the long term but affect fund houses, as it will lower the expense ratio. It determines how much money will be deducted from the net asset value of a mutual fund towards management of the fund. A higher fee charged from the investor means a higher expense ratio, and vice versa.

"It is a long-term positive as it will benefit the customers more. It is negative from a short-term perspective as it will bring down the revenues of bigger funds...which would have planned their revenue based on the previous working," said AK Prabhakar, head of research at IDBI Capital Markets.

At present, mutual funds pay distributors a commission as high as 2 per cent, against 1 per cent recommended by industry body Amfi (Association of Mutual Funds in India).

"Sebi's rules to lower investor fees will bring in more transparency," said Lav Kumar, head-products and business development, LIC Mutual Fund. "The step is investor-friendly and will increase their faith in mutual funds as a preferred and cost-effective mode of investment in capital markets," he added.

2. Listing of shares

Sebi has reduced the time for companies to list their shares after a public offer to three days, instead of six days previously. This means that once a company's Initial Public Offer (IPO) concludes, the shares will make a market debut after three days.

"This will reduce the time period of the funds locked in during the IPO & will also help the promotors gain faster access to the capital raised through IPO," said Mr Kumar of LIC Mutual Fund.

Currently, companies list their shares on the bourses six days after closure of the IPO. This is expected to benefit mutual fund investors.

"It is a very good thing as it lowers interest cost... A lot of people borrow funds to invest... Any reduction in the listing time will benefit the people," added Mr Prabhakar.

3. UPI payment option for IPO subscription

Sebi has approved introduction of UPI or Unified Payments Interface as an alternative payment option for retail investors to make purchases in an IPO. This means that the investor will be able to invest in an IPO by making payment through a mobile app. UPI is a payment system that enables inter-bank fund transfer through mobile apps.

4. Commodity market

Foreign entities with exposure to the country's commodity markets will be able to participate in the derivatives segment subject to certain conditions. Analysts say this is expected to deepen the commodities market. A common application form would be introduced for registration of foreign portfolio investors (FPIs) seeking to enter the domestic markets, according to Sebi.

5. Fund rules for NRIs

Sebi decided to relax foreign fund rules for non-resident Indians (NRIs). It was concerns related to these rules that had triggered fears of outflows and spooked the markets earlier this month.

The regulator noted on Tuesday that it "broadly agreed" with a working group's recent suggestions, which included allowing NRIs to invest as foreign portfolio investors (FPI) under certain conditions. The regulator said it would soon issue a circular with details.