• HDFC
• 26 Sep 2018
• Knowledge Centre

HDFC, Tester

In a move to make expenses of asset management companies (AMCs) more transparent, the Securities and Exchange Board of India (SEBI) on 17th August 2018, directed that all commissions and expenses must be borne by the scheme and not the associate or sponsor or trustee.

 

The market regulator also reduced the total expense ratio (TER) by 25bps (basis points)in the top slab for both equity and debt mutual funds. TER is a percentage of a scheme’s corpus that a mutual fund house charges toward expenses, including those of administrative and management.

 

SEBI stated that the mutual fund industry should implement the full trail model of the commission, without any upfront payment.

 

Some changes

 

The board of SEBI has cleared the proposal to cap the maximum TER for closed-ended equity schemes to 1.25%, and others to 1%. The maximum TER for open-ended equity schemes will be 2.25%. With regard to open-ended equity schemes, the highest expense ratio allowed to be charged for the first Rs 500 crores worth of assets will be 2.25%. As the AUM increases, the expense ratio will have to come down.

 

• For the next Rs 500 crores-750 crores, it will be 2%.
• Between Rs 750 crores- Rs 2,000 crores, the fee will be 1.75%.
• For Rs 2,000 crores -5,000 crores, it will be 1.6%,
• Large equity mutual funds with assets above Rs 50,000 crores will be able to charge just 1.05%.

 

Mutual fund advisors believe that equity mutual fund investors will benefit from the cut in total expense ratio in the long-term, while others say that the reduction in the expense ratio would bring direct and regular schemes to a level playing field, according to a report in a financial daily.

 

The beneficiaries

 

The report quotes Mr. Santosh Joseph, Founder of Germinate Wealth Solutions as saying, “This is a welcome step by SEBI. Investors are going to get benefit from a more transparent and cost-effective system. The lower expense ratio will impact returns, but it will not be an overnight turn around. Over a long period of time, a higher expense ratio could eat into your returns massively.”