SEBI Proposed Changes to Mutual Fund Total Expense Ratio

Introduction 

In a move to promote greater transparency and empower investors, the Securities and Exchange Board of India (SEBI) recently released a consultation paper addressing the review of Total Expense Ratio (TER) charged by Asset Management Companies (AMCs) to unit holders of Mutual Funds. With the aim of fostering transparency and benefiting investors through economies of scale, SEBI’s proposed changes are set to reshape the mutual fund landscape.  

Unraveling the Current Framework

Under the current regulations, AMCs can charge unit holders of mutual funds four additional expenses beyond the specified TER limits. These encompass brokerage and transaction costs, TER for distribution commission in B-30 cities, GST and exit load. TER, which represents a percentage of a scheme’s corpus, covers the expenses incurred by the mutual fund house.   

The Need for Clarity and Transparency

SEBI’s consultation paper highlights the need for clarity and transparency regarding the expenses charged to investors. While TER is meant to encompass all expenses, the current allowance for additional charges creates ambiguity. To address this, SEBI proposes that TER should reflect the maximum expense ratio an investor may incur, encompassing all permissible charges. This will ensure that investors are not subject to any additional fees beyond the prescribed TER limits.   

Growth and Evolution of the Mutual Fund Industry

SEBI acknowledges the significant growth of the Mutual Fund Industry in recent years, accompanied by increased participation from retail investors. With this evolution, the concerns that prompted the introduction of additional expenses over the TER may no longer hold true today. Thus, a re-evaluation of the existing framework becomes imperative.  

Proposed Reforms for a Level Playing Field

SEBI’s consultation paper puts forth several reforms to promote fairness and a level playing field in the mutual fund industry. These include allowing AMCs to undertake their own equity transactions, obtaining limited purpose memberships with stock exchanges. Additionally, for inflows from individual retail investors in B-30 cities, AMCs can charge expenses not exceeding 0.30% of daily net assets, proportionate to the inflows from these cities.  

Encouraging Women’s Participation

Recognizing the importance of gender diversity, SEBI proposes additional incentives for distributors who bring in investments from women investors. This initiative aims to encourage more women to participate in mutual funds, promoting inclusivity and empowering female investors.   

Forward-Looking Measures

SEBI also suggests discontinuing the provision that enables charging an additional expense of 5 basis points for schemes with an exit load after a period of 10 years. This change ensures long-term benefits for investors and simplifies the fee structure.  

Revised TER Slabs for a Balanced Industry

Acknowledging the concentration of assets under management (AUM) among a limited number of AMCs, SEBI proposes revised TER slabs. These new slabs aim to create a level playing field and address the financial challenges faced by smaller AMCs.  

Know More About What is Expense Ratio in Mutual Funds?

Conclusion

SEBI’s consultation paper on the review of Total Expense Ratio marks a significant step towards enhancing transparency, fairness and investor empowerment in the mutual fund industry. By addressing concerns, simplifying fee structures and promoting inclusivity, these proposed changes will pave the way for a more dynamic and investor-friendly landscape. As we move forward, let us embrace these reforms to foster trust, encourage wider participation and create a robust mutual fund ecosystem for all stakeholders.