Can a performance-based fee improve MF outcomes?

India's Securities and Exchange Board is considering a new mutual fund (MF) category that ties managers' fees to performance. Under the proposed system, base fees would be reduced, with any additional fees dependent on the portfolio performing better than the benchmark. It would make India one of the few markets with such fees. Around 88% of actively managed funds in India underperformed the S&P BSE 100 in 2019. However, the effectiveness of the fees will depend on how the structure is designed, with concerns around transparency and the potential for excessive risk-taking by fund managers.

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