Market watchdog Sebi has finally come out with the much anticipated consultation paper on the rationalisation of total expense ratios for mutual fund schemes. CNBC TV18 had first reported about SEBI’s plans on TER rationalisation in February, this year.

According to the existing regulatory framework, fund houses charge total expense ratios on the basis of a scheme's Assets Under Management (AMC). Industry participants say that the impact of the AMC level TER will be more on bigger AMCs compared to smaller ones.

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If Sebi goes ahead with the new TER structure, the total expenses paid by the investors will go down as the new TER's will have GST, transaction costs and distribution commissions included. The revised slabs for TER proposed by Sebi has higher TER limits so as to cover all costs and expenses including GST on management fees.

Accordingly, AMC level slabs for equity based AUM of schemes have been proposed. According to the proposed slabs, 2.55 percent TER can be charged by equity schemes of AMCs with a total AUM of up to Rs 2,500 crore. On the next Rs 2,500 crore, the AMCs can charge 2.45 percent in its equity schemes. The TERs levels drop on increasing AUM thereafter. Take a look:

These rates are for the regular plan. TER of direct plan will be TER charged to regular plan minus distribution commission.

“I think what sounds logical is that the TER should be all-inclusive and no charge outside TER. The fact that women investors are being addressed is a way forward. However, the problem that I have is that investor education should never be touched for anything else. There will be a revenue impact because of this. One has to see how to handle this. It is a developing issue at the moment,” said a mutual fund manager, on the grounds of anonymity.

Radhika Gupta, MD & CEO, Edelweiss Asset Management Limited (EAML) said that the embracing change is crucial in their journey towards progress.

"The transparency level of our industry continues to rise and the inclusion of brokerage costs in the TER is unprecedented. The cost of ownership for mutual funds will decrease, particularly for large equity-oriented funds. However, high-churn categories like arbitrage may face challenges," she said.

Mutual Fund schemes are currently permitted to charge four additional expenses which are over and above the expense limits. Fund houses also charge additional brokerage and transaction costs which are incurred for the purpose of execution of trade up to 0.12 percent of trade value in case of cash market transactions and 0.05 percent of trade value in case of derivatives transactions.

Apart from this, expenses not exceeding of 0.30 percent of daily net assets, subject to new inflows from B-30 cities. Additional expenses not exceeding 0.05 percent of daily net assets for the schemes having provision of exit load. Also, goods and services tax on investment and advisory fees charged by Mutual Funds /AMCs to the scheme are also charged by the AMCs.

According to the existing TER structure, the TERs are based on scheme AUM rather than AMC level AUMs. Currently, on the first Rs 500 crore of the daily net assets, the TER limits for Equity Oriented Schemes is 2.25 percent. The limit for other than equity schemes is 2.00 percent. On the next Rs 250 crore of the daily net assets, the TER is 2.00 percent on equity schemes and 1.75 percent on debt and other schemes. Here’s a look at the existing TER framework:

The TER limits for the schemes other than equity and debt are listed below:

In its latest consultation paper, Sebi has noted that, despite presence of various mutual funds with significantly large AUMs in schemes which are oriented towards retail investors i.e. equity and hybrid schemes, the TER charged is mostly close to the prescribed regulatory limits. However, in case of debt schemes, with investors being mostly corporates/ institutional investors having bargaining power, the TER is much lower than the prescribed limit. Therefore, the benefit of economies of scale accruing in the debt schemes appears to be passed on to the investors but not so in the Equity and Hybrid schemes.

For hybrid and solution oriented schemes, Sebi has proposed that the above TER slabs be applied for equity portion of AUM of schemes and on the remaining AUM of the scheme, the TER for other than equity & equity related instruments may be applied.

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(Edited by : Anshul)

First Published:May 19, 2023 1:58 PM IST