Vanguard has one avowed aim in its business: Cost cutting. It slashes costs regularly and is now EASILY the ‘least expensive’ (no not cheap!) fund house in the world. Look at its costs – and the Indian industry will rush to say how they do not have volumes. They will not tell you that when SEBI fixed these charges (TER) I think UTI was the biggest fund house and the biggest scheme in the country had about Rs. 750 crores.  For actively managed equity funds, the expense ratio allowed by SEBI is a maximum 2.5 per cent for the first ₹100 crore (average weekly net assets), 2.25 per cent for next ₹300 crore, 2 per cent for the subsequent ₹300 crore and 1.75 per cent for the balance corpus. For debt funds, the expense ratio allowed is 0.25 percentage points lower than equity funds.

So almost all expenses were allowed fixed as a percentage. Frankly it did not matter whether it was a percentage or it was in absolute terms. Now look at one of the biggest funds – Hdfc Prudence. Hdfc Mutual fund still gets expenses as a %age of the fund..assuming it gets 1% as fees..it means it gets Rs. 300 crores from this one scheme itself. Immaterial of whether the fund does well or no. What are the expenses related to a particular scheme?  It includes fund management fees, marketing or selling expenses, transaction costs, investor communication costs, custodian fees, and registrar fees. NOW TELL ME WHY SHOULD THIS BE A %AGE? Costs are absolute, right? 

For Vanguard reducing costs is far more important than getting better performance. It is a fetish, and it does work well for them. Vanguard has a decent record in equity funds, but it does well in bond funds, where its low costs give it an advantage competitors find hard-pressed to reach, let alone overcome.

So if you are a serious investor you should look at expenses of Indian mutual funds and keep wondering why our fund houses have such good looking offices, and high cost people to run what should be a simple business! Anyway how a fund runs its business is its look out not mine.

One thing SEBI can do is to allow foreign funds to operate in India without FORCING THEM TO SET UP A FULL FLEDGED office in India. So if Vanguard can come to India and set up a small operation – more like a branch – than a full office with CEO, CIO,….blah blah blah, they might be interested. Lets see what happened to Fidelity. Fidelity had (has) a full team to invest in India. Let us assume that they had 4 fund managers, and 20 analysts tracking the Indian market for running its India centric funds. Fairly obvious that they did not think it was necessary to locate them in India – it made sense to be located in Hongkong. Now the same TEAM could easily have launched one more scheme for Resident Indians. So you and me would have benefitted from the Fidelity expertise in Hongkong. Well our ‘free economy without shackles’ does not allow that. So they had to set up an office in India. They chose the most expensive slum – Mumbai – Nariman Point – one of the best buildings. Costs started adding up – rent, salaries, big team….so suddenly with US $ 2 billion they business did not look good. This business would have looked good if it was run from Hongkong.

Who lost? Fidelity? No. The common man – you and me. Fidelity is buying Indian shares for its overseas clients. Fidelity does not have Indian resident clients, that is all.

Has regulation ever, ever, ever reduced prices? No.

It is time that we dared to allow foreign competition. We will. I guess the big 5 Indian companies will have to go public. Once done they will talk like “we have always wanted competition” kinda language. I hope to live to see that day.

Uber, ola made the black and yellow taxis behave.

In 1988 I paid Rs. 2500 to attend a cousin’s wedding in Chennai – by Indian Airlines. In 2015 I paid Rs. 2500 to attend her son’s wedding in Chennai. No regulator did this. It was competition.

Once Fidelity, Vanguard and their likes are here, SEBI can shut down all committes on costs. All the 13 Indian mutual funds will cut costs. Are you wondering what happened to the other 30 mutual funds?

Come on take a guess!!!

http://mfcritic.blogspot.in/2017/09/excessively-expensive-income-funds.html