Mutual Funds: SEBI’s Proposal on Performance-Based Charging

UPSC CSE Syllabus Link: GS III – Economy | (Open-ended vs. Close-ended Mutual funds)

What is Mutual Fund?

A mutual fund is like a big pot of money collected from many investors (like you and me). This money is managed by professionals (Asset Management Companies, or AMCs) who invest it in stocks, bonds, etc.

Open-ended Mutual Funds

These are the most common type in India. They allow investors to buy or sell units anytime (except weekends/holidays). The price is based on the NAV (Net Asset Value), which changes daily. There is no fixed maturity period.

Example: If you invest in HDFC Flexi Cap Fund, you can invest ₹5,000 today and withdraw ₹10,000 next month.

Think of it as a restaurant that’s always open — people can walk in and out anytime.

Close-ended Mutual Funds

These are less common now. You can invest only during the launch period (NFO — New Fund Offer). After that, the fund is closed for new investments and has a fixed maturity period (e.g., 3 or 5 years). You can redeem your money only at maturity unless the fund is listed on a stock exchange.

Example: SBI Fixed Maturity Plan (FMP) — you invest during NFO, and after 3 years, you get your returns.

It’s like a train — once it starts, you can’t get on or off until the next station (maturity).

Quick Comparison Table

Feature	Open-ended Fund	Close-ended Fund
Investment period	Anytime	Only during NFO
Maturity	No fixed period	Fixed (e.g., 3 or 5 years)
Liquidity	High (buy/sell anytime)	Low (only through exchange)
NAV	Updated daily	May differ from trade price
Example	HDFC Flexi Cap Fund	SBI FMP – 3 Years

Why in News: SEBI’s Proposal on Performance-Based Fees

Currently, every mutual fund charges a fixed expense ratio — a percentage of your investment that goes to the AMC. For example, if the expense ratio is 1.5%, and you invested ₹1,00,000, then ₹1,500/year is charged whether or not the fund performs well.

SEBI has proposed a performance-linked fee model, meaning the AMC’s fee will depend partly on how well the fund performs compared to its benchmark (like Nifty 50). If the fund outperforms, the AMC earns more, if it underperforms, the AMC earns less.

Example: If a fund has a base expense ratio of 1% and a performance-linked component of 0.5%, then if it beats its benchmark, AMC can charge 1.5%; if not, it gets only 1% or less.

This makes AMCs more accountable — they earn more only when investors earn more. SEBI’s goal is to protect investors’ interests and improve transparency.

Summary

Concept	Meaning	Example
Open-ended fund	Buy/sell anytime	HDFC Flexi Cap Fund
Close-ended fund	Fixed period, invest only at start	SBI FMP – 3 Years
SEBI proposal	AMC charges linked to performance	Earn more only if fund beats benchmark

About SEBI (Securities and Exchange Board of India)

• Statutory Body: SEBI is a statutory regulator, established by an Act of Parliament (SEBI Act, 1992). It is not a constitutional body.
• Headquarters: Located in Mumbai.
• Regulatory Domain: Regulates major market segments including:
  • Stock Exchanges (e.g., NSE, BSE)
  • Mutual Funds
  • Venture Capital Funds (VCFs)
  • Collective Investment Schemes (CIS)
  • Merchant Bankers
  • Credit Rating Agencies (CRAs)
  • Foreign Portfolio Investors (FPIs)
• Quasi-Legislative, Quasi-Judicial, and Quasi-Executive Powers:
  • Quasi-Legislative: It can frame regulations (rules) under the powers vested by the SEBI Act.
  • Quasi-Judicial: It conducts inquiries and passes rulings/orders against market intermediaries for violations. It has established the Securities Appellate Tribunal (SAT) as its appellate body.
  • Quasi-Executive: It enforces its regulations and decisions.
• Composition of the Board:
  • One Chairman (appointed by the Central Government from amongst persons of ability, integrity, and standing in the field of finance, economics, law, accountancy, management, etc.).
  • Two members from the Ministry of Finance (one from the Reserve Bank of India is ex-officio).
  • Two members appointed by the Central Government.
  • The remaining members are appointed by the Central Government from among persons of ability, integrity, and standing in the fields of securities market, economics, law, accountancy, etc.
• Key Functions (The ‘What’):
  • Regulating Intermediaries: Registering and regulating market intermediaries like brokers, sub-brokers, registrars, etc.
  • Investor Grievance Redressal: Manages the SCORES (SEBI Complaints Redress System) platform.
  • Prohibiting Unfair Trade Practices: Stops practices like insider trading, price manipulation, etc.
  • Disclosing Information: Mandating disclosures by listed companies to ensure transparency.
  • Promoting Investor Education: Undertaking steps for investor awareness and education.

How UPSC can test the aspirant on awareness about SEBI?

Prelims	Questions about its establishment year, statutory status, the appellate body (SAT), or the difference between SEBI and RBI’s roles.
Mains	Questions on the efficacy of SEBI in curbing insider trading, the role of SEBI in capital market development, or the challenges in regulating Fintech/Crypto in the securities space.