mumbai, Dec. 25 -- Mutual funds are pushing back against the Indian market regulator's proposal to introduce a fee linked to good performance, citing the difficulty of calculating these amounts. The Securities and Exchange Board of India (SEBI) announced a proposal on October 28 requiring mutual funds to charge a performance-based expense ratio in a scheme, along with other measures to revamp regulations in the sector. Some fund houses have individually submitted feedback to SEBI on the complexities of charging a performance fee, six people aware of the matter told Mint. A discussion on the matter at the Association of Mutual Funds in India level is yet to happen, three of them said. The key concern for asset management companies (AMCs) is the complexity of calculating a performance-linked expense ratio of a product where investors enter and exit at different points. Two investors in the same scheme can experience very different returns, depending on when they invest, making it difficult to arrive at a single performance-based fee that applies fairly to all. This uncertainty could leave fund houses unable to estimate revenue, while investors may struggle to anticipate how much they will end up paying, particularly in a volatile market. "Mutual fund investors will not be able to easily estimate in advance what the fee will be as it includes a complex accounting mechanism," said Deepak Shenoy, chief executive officer at Capitalmind Mutual Fund, adding that there is an operational complexity with implementing performance-based expense ratios. Such an expense ratio for performance would be voluntary and a detailed framework would be finalized separately in consultation with stakeholders, according to the draft SEBI paper. "In the event of a sharp market downturn, mutual funds may struggle to even cover management costs as the performance-based fees may not be earned," said Jimmy Patel, managing director of Quantum Mutual Fund. Patel added that for such a model to work, AMCs would need robust investment processes, sufficient portfolio liquidity and clear benchmarks as monitoring performance for investors at large would ultimately depend on the ability to consistently generate alpha over the benchmark. Fund houses are also uncertain about how the performance of a scheme would be established to qualify for rendering a fee. "It's not easy to define performance in capital markets. Should the performance be judged on the basis of one year, three years or five years? Should one judge performance on the basis of rolling returns or point-to-point returns? These are difficult questions. And until these things are clearly defined, there will be no visibility of further regulations on performance fees," said an AMC official on condition of anonymity. However, the market regulator wants to implement the proposal for the benefit of investors....