New Delhi — India scored a grade of C+ in Morningstar India’s biannual Global Fund Investor Experience report, which assesses the experiences of mutual fund investors in 25 countries across North America, Europe, Asia, and Africa.
China received the lowest grade of a D+ because of high fees, limitations on overseas investing, and restrictions on foreign-domiciled funds.
The researchers identified Korea and the United States as the most investor-friendly markets and China the least investor-friendly market.
Morningstar evaluated countries in four categories that are weighted to calculate the overall grade:
- Regulation and taxation,
- Fees and expenses, and
- Sales and media.
Morningstar researchers generally favour active fund regulation; a low investor tax burden; more disclosure; lower fund fees; a varied fund distribution system; and local news media that helps to educate investors about their choices.
The surveyor assigned countries a letter grade for each of the four categories and used the underlying scores to produce an overall country grade. The analysis was based on information from publicly available sources, Morningstar data, and Morningstar experts located in the company’s offices around the world.
With an overall grade of C+, India has a mix of outstanding practices and others that fail to meet global standards, relative to other markets evaluated in this report A particularly notable feature of the Indian fund market is the lack of any asset-based commissions.
India also prohibits funds from charging performance fees, which is commendable and atypical among the countries in the survey. However, Indian funds still have average-to-expensive total expense ratios overall for equity and allocation funds.
In the regulation and taxation category, India receives a B- grade. India is one of only a few countries in the report that continues to have capital controls, which limits investors’ ability to invest in foreign securities.
Since 2014, the market regulator in India requires that asset management companies invest 1% — subject to a maximum of Rs 5 million — of all seed capital raised at the fund’s inception during the life of the fund.
Morningstar considers the requirement a positive step as it aligns the interests of the fund company with that of investors.
In the disclosure category, India receives a C+ grade. India requires disclosure of full fund portfolio holdings monthly instead of on a semiannual basis typical of other markets evaluated in the report.
India is one of only two countries that hold this distinction. Investment strategies and risks found in fund documents, however, are typically generic and provide little useful information.
The overall country grades for 2015 are below, from highest to lowest and then in alphabetical order:
United States: A
The Netherlands: A-
United Kingdom: B+
New Zealand: C+
Hong Kong: C
South Africa: C
Additional key findings of the 2015 report include:
- Korea received an A this year because of its improved sales practices, up from a B+ in 2013, and is the only other country aside from the United States to achieve the top grade.
- The United States garnered the highest score for the fourth time with a top grade of A. While the United States boasts relatively low expenses and strong disclosure, its Sales and Media category grade is average.
- The Netherlands rose to an A- grade in 2015, compared with a B in 2013, improving in the areas of Fees and Expenses and Sales and Media assisted by a newly implemented ban on advisor commissions.
- Finland received a grade of B-, reflecting consistent practices that have developed from pan-European regulations.
- China received the lowest grade of a D+ because of high fees, limitations on overseas investing, and restrictions on foreign-domiciled funds.
- Since the 2013 study, regulators in New Zealand introduced semiannual portfolio holdings disclosure, while Thailand plans to move from semiannual to quarterly disclosure. Australia is now the only market that does not have portfolio holdings disclosure requirements. The global fund industry is generally ahead of regulatory requirements, with monthly holdings releases becoming common.
- Nearly every market has enacted new or updated regulations over the past two years, which shows active engagement by regulators in the areas Morningstar evaluates in the report.
- In the United States, Australia, South Africa, and The Netherlands, ongoing fund fees are typically unbundled, which decreases reported fund fees. However, if investors are paying for both advice and an administration platform, the total cost of owning a fund could be an additional 1.0 to 1.5%.
- In 22 of the 25 countries evaluated, banks and insurance companies are named as one of the dominant fund sales channels. The next most common channel, cited in seven countries, is the independent advisor.
March 2015 report
India was found performing better than China as an investor-friendly market, the Morningstar biannual Global Fund Investor Experience report examining 22 countries had found even in 18 March this year.
Below were the overall country grades, from highest to lowest scores in alphabetical order:
United States: A
United Kingdom: C+
Hong Kong: C
South Africa: C-
New Zealand: D-
The survey identified the United States and Singapore as the best markets for fund investors based on such criteria as investor protection, transparency, fees, taxation, and investment distribution. New Zealand scored the worst, but has been showing signs of improvement since Morningstar published its first study in May 2009.
Overall, India scored a B, which is high for an emerging fund market. The survey notes that India is not afraid to be different — being the only country in this survey to have banned funds’s front-end load charges.
Some India-centric excerpts from the report:
- India has excellent disclosure and is one of only two countries where portfolios are typically disclosed monthly.
- Sales and media practices are also good. Indian investors enjoy an open sales system, as the vast majority of fund distributors offer the choice of multiple fund providers. Low investment minimums make Indian funds widely accessible to middle-income buyers. For its part, the media does well in reporting on a daily basis about mutual funds.
- India’s main drawback is high fund expenses. India is one of only four countries in this survey with equity-fund annual expenses that exceed 2%, meaning that Indian investors pay double what those in the lowest-cost countries are charged. Indian fixed-income and money-market funds are not cheaper.
- Indian regulation is a mixed bag. Indian investors face capital controls that limit their ability to invest in foreign securities. On the other hand, India has been actively modernizing its fund laws, and the regulator is pro-active in identifying violators of securities laws.
Morningstar India, a subsidiary of Morningstar, is a leading provider of independent investment research. Morningstar Inc is an investment research and investment management firm headquartered in Chicago, Illinois, United States.