Expense Ratio & MF Returns

With the Securities and Exchange Board of India expected to soon release a consultation paper on total expense ratio (TER), it is time to understand how this impacts the investor's cost of investment as well as the income of the asset management companies

In the final week of June, several asset management companies (AMCs) listed on the stock market experienced a significant surge in their share prices, with gains exceeding 10 per cent. This sudden increase can be attributed, in part, to the decision made by the Securities and Exchange Board of India (SEBI), the capital market regulator, to defer the rationalisation of the total expense ratio (TER) for mutual fund (MF) schemes. The TER represents the expenses that AMCs can charge their investors and serves as a crucial source of revenue for these companies. Initially, it was anticipated that SEBI would revise the TER, thereby impacting the financials of AMCs. However, SEBI Chairperson Madhabi Puri Buch said that the regulator will soon release a second consultation paper on TER.

She hinted that the new proposals would be less stringent than the earlier ones, and that the mutual fund industry would be happy with them. SEBI is considering a number of factors in its review of TER, including the need to protect investors, the cost of managing mutual funds, and the competitive landscape. She said that the regulator is committed to finding a balance that will benefit all stakeholders. Despite the seemingly low value of the expense ratio, its significance lies in the substantial impact it can have on the returns generated by MF investors. In the following paragraphs, we will delve into the concept of TER and explore its implications for investors in mutual funds.

What is TER?