Mutual fund expense ratio may be cutA potential cut in the additional mutual fund expense ratio from 0.2% to 0.05% comes on the back of other cuts that will go into effect from April 2018. India’s average equity fund expense ratio is 2.22% according to a study conducted by Morningstar in October 2017.

Base Total Expense Ratio (TER)

Mutual funds fees and expenses are currently capped by SEBI as a proportion of their weekly average assets under management or AUM. The cap is 2.5% for equity funds and 2.25% for debt funds. This cap gets more stringent, as the AUM of the fund grows bigger.

Assets under Management Equity Funds Cap Debt Funds Cap
First Rs 100 crore 2.5% 2.25%
Next Rs 300 crore 2.25% 2%
Next Rs 300 crore 2% 1.75%
Balance Assets 1.75% 1.5%

Direct vs Regular

A lower expense ratio is charged by the direct plans of funds than regular plans because they do not include distributor commissions. Direct plan expense ratios are typically 1% lower for equity funds and 0.5% lower for debt funds than their regular counterparts.

The Other Expenses

However certain charges, as mentioned below, can be charged by funds in addition to the basic total expense ratio cap.

Top 30

Funds which receive more than 15% of their AUM or 30% of their gross inflows from outside the top 15 cities can charge another 0.3% of their AUM as expenses. A recent SEBI circular has declared that the inflows or AUM must come from outside the top 30 rather than top 15 cities from April 2018. This is likely to bar many fund houses from levying this charge.  

The 0.2%

Funds can charge 0.2% as compensation in return for not being allowed to utilize exit loads towards their expenses. However, a recent SEBI notification stated that mutual funds which did not charge an expense ratio such as close-ended funds could not impose this charge. The Economic Times now reports that even funds which charge expense ratios may be forced to cut this expense from 0.2% of AUM to 0.05%.

The cumulative effect of these cuts can cause expense ratios in some funds to drop by as much as 0.45%, a significant saving for investors.

Author
Neil Borate

Neil Borate is Deputy Editor, RupeeIQ. He can be contacted at neil@rupeeiq.com.