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The service tax issue looms large on the mutual fund industry. And who will have to finally pick up the tab?

A solution to the same is yet to be worked out because the question of who is actually the beneficiary in this case – whether it is the asset management company or the investor remains to be decided.

As of now reports state that asset management companies (AMCs) have decided to fork out a lumpsum towards service tax. And that the mutual fund investor will not be burdened with an added cost.

But the matter does not end there. At some point will not AMCs consider passing on the said cost to investors?

Even otherwise, the expenses on funds are quite high and any further hike may act as a discouragement to investors choosing mutual funds to park their funds.

The Securities and Exchange Board of India (SEBI) has laid down limits on the expenses that a fund can charge.

The total recurring expense that can be charged to the scheme is 2.5 percent for the first Rs 100 crore mobilised, 2 percent and 1.75 percent for subsequent mop-ups in an equity scheme.

To add to it there are damaging reports about fund houses violating the norms laid down by SEBI by following unethical practices. Such instances can only mar investor trust and push individuals to switch over to other investment avenues for good.

As per the norms laid down by SEBI the total expenses of a scheme, excluding issue or redemption charges, should be not more than 2.5 percent of the average weekly net assets.

This leaves little scope for further additions. In such a situation, perhaps all that can be done is to squeeze in the service tax component from within the annual expenses. But will mutual funds agree to that one?