Self-managed Fund

In an Indian AIF, two sets of costs are kept strictly apart.

The manager runs the money. Everything it costs to run the money — salaries, rent, travel, deal work — is the manager's own expense. It is paid for out of the management fee, and the workbook is firm that it cannot be charged to the fund. The fund pays only fund-level expenses, and investors usually bargain for caps on those too.

A self-managed fund rearranges that. The investment team are not the manager's employees. They are employees of the fund. Their salaries and their working costs come straight out of the fund.

So there is less left for a management fee to cover, and the fee is lower. The workbook presents this as a practice found internationally, not as an Indian option.

The important point is that a lower fee here does not mean a cheaper fund. The same costs are still being paid. They have simply moved from one line to another.

The Indian default (section 3.7.4). The function of investment management is performed by the manager, and all such associated costs have to be borne by the manager and cannot be charged to the fund. That single sentence is the rule the self-managed model is the exception to.

The exception. Internationally there is a concept of a self-managed fund, where the investment manager executives are employees of the fund itself and draw salaries and other expenses from the fund, and hence the management fee is lower than the regular funds.

What moves onto the fund in that model. The workbook lists them:

One thing that does not move either way. The same section notes that managers do not usually pay any finder's fee to investment banks or consultants for sourcing deals — so sourcing cost is not the hidden item a candidate might expect it to be.

What the lower fee is lower than. XIX-A gives no figure for a self-managed fund's fee. What it does give, in the next section, is the customary benchmark for a normally managed fund: in developed markets PE funds have been structured as 2-20, meaning 2% management fee and 20% additional returns — and the workbook adds that the 2-20 structure is not a standard feature in the evolving Indian AIF market. Read the 2% as the comparator the phrase lower than the regular funds is measured against, not as a figure the workbook attaches to a self-managed fund.

The investor-side control. Chapter 3 also records that investors usually insist on caps on each head of expense, or on overall expenses chargeable to the fund, either during its life or on an annual basis, including distribution and placement commissions. In a self-managed fund those caps are doing far more work, because far more is chargeable.

Two funds of identical size. Illustrative figures, except the 2% which is the workbook's own 2-20 benchmark.

Fund A — the normal Indian structure. Meghna India Fund I, corpus Rs 300 crore, managed by Meghna Capital AMC.

Management fee to the AMC   2% x Rs 300 crore   =  Rs 6.00 crore a year
Borne by the AMC out of that fee:
  investment team salaries, office [lease](/glossary/lease), maintenance,
  travel, outsourced support, [due diligence](/glossary/due-diligence), documentation
Charged to the fund:        nil of the above
Total investor cost                             =  Rs 6.00 crore a year

Fund B — a self-managed fund abroad. Same Rs 300 crore, same team, but the team are employees of the fund.

Management fee            0.75% x Rs 300 crore  =  Rs 2.25 crore a year
Charged directly to the fund:
  salaries, lease, maintenance, travel, outsourced
  support, due diligence, documentation           Rs 4.00 crore a year
Total investor cost                             =  Rs 6.25 crore a year

The headline fee has fallen from 2% to 0.75%. The investor is paying slightly more, not less. A distributor comparing the two on fee alone would get the answer exactly backwards.

And this is where the investor's caps matter. If Fund B's investors had negotiated an annual cap of Rs 3 crore on expenses chargeable to the fund, the Rs 1 crore of excess would fall back on the manager — which is the whole purpose of asking for a cap on each head of expense rather than only on the fee.

Chapter 3 (Concepts in Alternative Investment Funds Industry), section 3.7.4 on Investment Management Costs, immediately before section 3.8 on preferred and additional returns. It is a short passage, and it is examined as a contrast rather than in its own right: in an AIF, investment management costs are borne by ______ (the manager, and they cannot be charged to the fund), with the self-managed fund offered as the distractor or as the exception.

For a distributor the examinable point is the one the worked example makes. A lower management fee is not automatically a cheaper fund, and Chapter 13's good practices require the distributor to disclose all material information including Hurdle Rate, Management Fees, Additional Return if any, Catch-up if any, Expenses chargeable to the Fund and those that are borne by the Investment Manager — that last clause is precisely the self-managed fund distinction.

• The workbook gives no figure for a self-managed fund. It says only that the fee is lower than the regular funds. The 2-20 structure quoted above is the comparator from the next section, and even that the workbook calls a developed-market custom that is not standard in India.
• A lower management fee does not mean a lower total cost. The costs have moved to the fund, not disappeared.
• This is an international model, not an Indian entitlement. The Indian rule in the same paragraph is that investment management costs cannot be charged to the fund.
• Do not confuse it with a Migrated Venture Capital Fund or any SEBI category. Self-managed is a description of who employs the investment team, not a registration status.
• It is not the same as a fund with no manager. There is still an investment manager function and still an investment management agreement; the executives simply sit on the fund's payroll.
• Managers do not usually pay a finder's fee for sourcing deals, in either model — so that is not the cost that distinguishes them.