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Suresh Krishnamurthy

SUNDARAM Mutual Fund has cut the expense ratio on Sundaram Select Debt, a fund that has been aimed at knowledgeable investors who want a greater say in managing their investment affairs. The expense ratio for a combined asset plan, which is similar to typical bond funds, has been pegged at 1.25 per cent. The expense ratio for the long-term asset plan is even lower, at 0.65 per cent.

In Sundaram Select Debt, the expense ratio for the combined asset plan is not much below what some large bond funds are expected to charge. It may, however, be lower than what Sundaram Bond Saver, the successful bond fund product from Sundaram Mutual, is likely to charge.

The expense ratio for the long-term asset plan is however substantially below average. Long-term asset plans may be subject to the risk of a rise in interest rates and, therefore, may not be suitable to investors who do not have a long-term investment horizon in mind.

The rationale for the reduction is that this product (Sundaram Select Debt) will not incur heavy advertising or marketing expenses as it is targeted at knowledgeable investors. At least, so says Sundaram Mutual. Then, it may be better if every mutual fund comes out with a debt fund product in which advertising and marketing expenses will be lower.

That way the annual expense charge can be minimised. As these funds grow larger over the years, the expense ratio can be brought down further. Expense ratios have now become critical following the decline in expected yields from an investment. They are now 7-8 per cent for long-term investments in triple-A rated investments and government securities. These, in turn, have made large bond funds attractive as such funds are theoretically in a better position to reduce the annual charge.

Larger funds have their own disadvantage in that they have necessarily to take higher interest rate risk as investments of their choice and in desired magnitude are not available in the relatively less liquid Indian debt market. This enabled mid-size and smaller funds to outperform larger funds in the past. Now, it remains to be seen if the larger funds outperform their smaller compatriots because of the cost benefits. A few years down the line, it may only be the costs that separate the top performers from the also-rans.

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