What Do New Expense Ratio Slabs Mean For You?

The Securities and Exchange Board of India (SEBI) had announced new total expense ratio (TER) slabs in September 2018.

- Sudipta Mitu

These came into force from April 1, 2019. Let us try and understand what these new TER rates mean for you.

Under the new slabs, the maximum expense ratio that fund houses can charge from investors has come down. In case of equity funds, the maximum base TER allowed earlier was 2.50 per cent. This has now been brought down to 2.25 per cent. The maximum expense ratio that non-equity funds can charge has come down from 2.25 per cent to 2 per cent. Thus, most investors stand to benefit from this change. Lower costs will translate into higher returns for investors.

If you compare the old expense ratio slabs with the new ones, expense ratios come down especially for funds that have assets under management (AUM) of more than Rs. 2,000 crore. There will not be much difference in the maximum base TER permitted for funds of lower size. Also, under the new slab structure, there will be almost a 40-basis-point difference between smaller-sized funds and larger-sized funds.

A lower expense ratio is indeed advantageous to investors as it means that a larger portion of the returns earned by the fund manager get passed on to the investor. In funds where the expense ratio is higher, the return that gets transmitted to the investor is lower.

Nowadays, active fund managers are having a hard time beating their benchmarks. This is especially true for large-cap funds, where alpha generation has declined. Due to this, many fund houses have themselves lowered their expense ratios, since it is also important for them to demonstrate that they can generate alpha on a sustainable basis. A lower expense ratio may help more funds beat their benchmarks. Investors too should avoid selecting largercap funds that have a very high expense ratio.