In a bid to bring transparency to the costs charged to mutual fund (MF) unitholders, the Securities and Exchange Board of India (Sebi) has proposed a uniform total expense ratio (TER) across MF schemes
Sebi’s proposal to introduce a uniform total expense ratio (TER) for mutual funds is a transformative move, designed to bring increased transparency and fairness to the industry. “I see this as a strong step towards leveling the playing field for all investors,” said Sonam Srivastava, Founder & CEO, Wright Research.
The uniform TER will reduce complexity and make cost comparisons across funds much easier. While the move might put pressure on fund houses in the short term, it is expected to enhance investor trust and stimulate long-term growth in the sector, added Sonam.
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The industry’s strong volumes, however, are able to absorb this impact with ease, making it a tolerable adjustment for the AMCs, he added.
At present, Sebi allows asset management companies to charge unitholders of mutual funds four additional types of expenses over and above the specified TER limits.
1) Brokerage and transaction costs.
2) Additional TER for distribution commission for inflows from B-30 (beyond the top 30) cities.
3) Good and services taxes.
4) Additional expense for exit loads.
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What is TER?
The TER is a percentage of a scheme’s corpus that a mutual fund house charges towards expenses including administrative and management.
“TER reflects the maximum expense ratio that an investor may have to pay and hence it should be inclusive of all the expenses permitted to be charged to an investor and the investor should not be charged any amount over and above the prescribed TER limits,” Sebi said in its consultation paper.
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Sebi’s new proposal for MF investors
1)Sebi proposed that brokerage and transaction expenses may be included within the TER limit.
2)Besides, all expenses and costs of investment including STT (Securities Transaction Tax) should be within the TER limit.
3) It has been suggested that there should be uniformity in charging each and every expense to the investor of regular plan and direct plan.
4) The only difference between the TER of the regular plan and the direct plan should be the expenses towards the distribution commission.
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5) Capital markets regulator suggested that unitholders should be given the option to exit at the prevailing net asset value (NAV) without any exit load when there is an increase in TER and proposed to lower the exit load of an open-ended scheme to a maximum permissible limit of 2 per cent.
6) It has been recommended that payment of upfront commission by investors directly and transaction costs deductible from investments of investors, should not be allowed.
7) Sebi suggested an additional incentive may be introduced for distributors for new investments from women investors (new PAN) at the industry level.
However, implementation and monitoring will be critical. “The industry will need to balance this new uniformity with the diverse needs of different types of funds and their strategies,” Sonam Srivastava.
Overall, this proposal is a testament to SEBI’s commitment to protecting investor interests and fostering a more transparent and robust mutual fund industry, added Srivastava.
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Will it be beneficial for investors?
Bringing uniformity in TER incorporates all the fees charged by mutual fund investors, brokerage paid, and other securities too. In the present scenario, brokers can charge additional capital above the particular TER limits, said Arun Singh Tanwar, Founder, Get Together Finance.
“Another important perspective that SEBI considered is that TER is the maximum ratio of the total expense that the investor may have to pay and every particular charge should be included in that only. No further charge will be expected from the brokers. According to SEBI all the expenses must be at the AMC level and not the particular scheme level. The maximum charge that can be charged by the broker is about 2.25 only but since 2018 the level of rise in the assets of the mutual fund industry depicts that investors are not working according to the schemes initiated by SEBI,” said Arun Singh Tanwar.
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Considering from the investor point of view when the expenses will go down the performance will automatically improve, he added.
Sebi said the consultation paper will form the basis of final guidelines after seeking comments from stakeholders by June 1.
