REGULATORY OVERHAUL

SEBI to revamp the mutual fund TER for investor benefit; final circular to be issued soon.

In May, the Securities and Exchange Board of India (SEBI) came out with a consultation paper on the total expense ratio (TER) charged by asset management companies (AMC) in India.

Since 2012, the market regulator has reviewed and made changes to provisions related to the fees and expenses charged by mutual fund houses. These changes include the introduction of direct plans, the fungibility of the total expense ratio, and additional expenses for net inflows from B-30 cities.

To enhance transparency and consistently align regulatory provisions with market dynamics and the best interests of investors, the market regulator conducted a comprehensive study on fees and expenses. SEBI determined that there was a requirement for further streamlining of provisions pertaining to TER.

CHANGES IN TER

In its consultation paper, SEBI stated that despite the maximum limit of the total expense ratio, there have been instances where the actual expenses borne by the investor exceeded the prescribed base TER limits for the regular plan.

For instance, fund houses can levy a TER of 2.25% for the initial ₹ 500 crore of the equity scheme’s daily net assets. However, the weighted average TER, which includes all additional expenses, paid by investors in the regular plan was 2.78%, surpassing the limit of 2.23%.

Despite the presence of various mutual funds with significantly large assets in schemes oriented towards retail investors (equity and hybrid schemes), the total expense ratio charged is mostly close to the prescribed regulatory limits.

However, in the case of debt schemes, where investors are mostly corporate and possess bargaining power, the total expense ratio is much lower than the prescribed limit.