True Economics or Forced Economies : Do Indian Funds Compete Under the Shadow of Regulatory Ceilings?

This paper studies the behavior of open ended equity funds and medium- and long-term debt funds in India under regulatory cost and management fee ceiling constraints. It attempts to see if competition renders regulation unimportant. Smaller equity funds spend lesser on marketing and waive a portion of their management fee to keep expenses below the ceiling. This tendency disappears as we reach the highest asset class which also appears to face diseconomies of scale. When controlled for regulatory cost ceilings, there are no economies of scale present. Debt funds are not constrained by regulatory cost ceilings as much as by the need for them to deliver better returns with decreasing debt returns and high equity returns. Their expenses and management fee are much below regulatory ceilings throughout all asset classes and tend to reflect true economies.