The fund house has proposed to cut the expense ratio on three of its funds as follows:
|Fund||Current Ratio||Proposed Ratio|
|HDFC Balanced Fund||0.31%||0.26%|
|HDFC Prudence Fund||0.66%||0.56%|
|HDFC Small-cap Fund||0.66%||0.36%|
Source: HDFC Mutual Fund
The proposed reductions will go into effect from 14th March 2018.
Base Total Expense Ratio
The cuts announced by HDFC MF are in the Base Total Expense Ratio or Base TER which forms the largest component of the expense ratio.
However this figure does not include the 0.30% additional amount the fund is allowed to collect if inflows exceed certain levels from outside the Top 15 (T15) cities. More specifically a fund is allowed to charge 0.3% extra if at least 30% of gross new inflows come from outside these cities or if at least 15% of the fund’s average AUM (Assets under Management), year to date, comes from outside these cities. New SEBI regulations, which will go into effect on the 1st of April 2018, will move the yardstick from beyond the top 15 to beyond the top 30. At present, HDFC Mutual Fund does satisfy the T15 requirements and hence levies this additional 0.3% charge. In all probability given its size the fund house will meet the new T30 yardstick as well.
The Base TER also does not include another 0.2% charged under heads such as marketing, brokerage, audit, registrar and transfer agent fees, custodian fees, investor communication costs, costs of providing account statements and dividends etc.
Finally, the Base TER does not include GST which is levied at 18% on the services rendered by the fund.
Once these excluded heads are added back, the expense ratios of HDFC Balanced, Prudence and Small-cap direct plans were 0.90%, 1.31% and 1.30% respectively. Once the proposed cuts go into effect, we estimate that these ratios will fall to 0.85%, 1.21% and 1.0% respectively. The actual figures may differ slightly from these estimates particularly of the way that GST is calculated and levied.
How do they compare to the regular plans in these funds? The table below gives you that answer.
|Fund||Direct Plan Expense Ratio||Regular Plan Expense Ratio|
|HDFC Balanced Fund||0.90%||2.10%|
|HDFC Prudence Fund||1.31%||2.41%|
|HDFC Small cap Fund||1.30%||2.50%|
Source: HDFC Mutual Fund
A regular plan includes the distributor’s commission whilst a direct plan does not. This is why regular plan expense ratios are higher.
Just how cheap are these funds in their categories?
HDFC Balanced Fund and HDFC Prudence Fund both fall in the same ‘Hybrid Equity Oriented’ category. They are nowhere close to being the cheapest funds in their category and are placed in the middle of the expense ratio pecking order. Baroda Pioneer Balanced Fund is the cheapest in this category with a total expense ratio of just 0.37%. It is followed by another fund from HDFC’s own stable – HDFC Equity Savings Fund with an expense ratio of 0.41%.
In the small-cap category, HDFC Small Cap is quite competitive on the expense ratio front. It takes the fourth spot from the top if funds are ranked by expense ratio. The leader is Reliance Small Cap Fund.