SEBI cuts expense ratio of MFs, scraps upfront commission to distributorsMarkets regulator Securities Exchange Board of India (SEBI) has announced new limits for Total Expense Ratio (TER) of mutual fund schemes, which would pave the way for lower costs of funds and higher returns for investors. TER is the percentage of your money that the fund management company takes as a fee, out of which the fund meets its expenses, payout to distributors and son on. The new rules will be effective soon.

Read: What does TER mean and how it will affect you?

Besides the lower TER, the SEBI has also directed fund houses to pay all commission and expenses from the scheme only and not from the AMC/Associate/Sponsor/Trustee, or any other route.

Further, in another major decision, the mutual fund industry must adopt the full trail model of commission in all schemes without payment of any upfront commission or upfronting of any trail commission, the SEBI said.

However, a carve-out has been provided for upfronting of trail commission in case of SIPs subject to fulfilment of certain conditions.

Total Expense Ratio (TER) for open ended schemes from now
Assets Under Management slab (Rs Cr) TER for equity oriented schemes TER for other schemes (excluding index funds, ETFs and Fund of Funds)
0-500 2.25% 2%
500-750 2% 1.75%
750-2000 1.75% 1.50%
2000-5000 1.60% 1.35%
5000-10000 1.50% 1.25%
10000-50000 TER reduction of 0.05% for every Rs 5000 crore AUM increase of part thereof TER reduction of 0.05% for every Rs 5000 crore AUM increase of part thereof
Above 50000 1.05% 0.80%

For TER for open-ended equity schemes, funds with AUM size of up to Rs 500 can charge TER of 2.25%. For funds with a size from Rs 500 crore to Rs 750, TER will be 2%. For funds with AUM between Rs 750 crore to Rs 2000 crore, TER will be 1.75%.

For funds with AUM between Rs 2,000 crore to Rs 5,000 crore, TER will be 1.60%. For funds with AUM between Rs 5,000 crore to Rs 10,000 crore, TER will be 1.50%. For funds with AUM between Rs 10,000 crore and Rs 50,000 crore, there will be TER reduction of 0.05% for every Rs 5,000 crore AUM increase of part thereof. Above Rs 50,000 crore funds, TER will be 1.05%.

Similarly, there are rules for other open-ended schemes. The smallest of funds in this category (debt etc) can charge 2.25% while the largest ones can charge 0.80%.

In case of close-ended and interval schemes, the TER for equity-oriented schemes shall be a maximum of 1.25% and for other than equity oriented schemes shall be a maximum of 1%.

For Index Funds and ETFs, the TER shall be a maximum of 1.00%. For Fund of Funds (FoFs), the TER shall be a maximum of twice the TER of the underlying funds.

For FoFs investing primarily in Liquid, Index and ETF schemes, the Total TER (including the TER of underlying schemes) shall be maximum of 1.00%.

For FoFs investing primarily in active underlying schemes, the Total TER (including the TER of the underlying schemes), shall be maximum of 2.25% for equity-oriented schemes, and a maximum of 2% for other than equity oriented schemes.

The additional expense permitted for penetration in B-30 cities shall be based on inflows from retail investors. The definition of ‘retail investors’ shall be determined in consultation with the industry, the SEBI said.

Pending such clarification, the additional incentive shall be permitted for inflows from individual investors only and not on inflows from corporates and institutions. Further, the B-30 incentive shall be paid as the trail only.

Earlier, mutual funds could charge expenses within the limits prescribed by the regulator. The maximum TER allowed was 2.5% for the first Rs 100 crore of average weekly total net assets, 2.25% for the next Rs 300 crore, 2% for the next Rs 300 crore and 1.75% for the rest. For debt funds, the initial limit allowed was 2.25%, which progressively dropped to 2%, 1.75%, and 1.5%.

The Sebi has also given rules for performance disclosure. Adequate disclosure of all schemes’ returns (category wise) vis-à-vis its benchmark (total returns) will have to be made available on the website of AMFI.

Upon implementation of the above decisions, the Trustees and AMC Boards shall monitor the implementation by the respective AMCs and shall report to SEBI periodically.

The Assets Under Management (AUM) of the mutual fund industry in India has grown manifold over the years. As on August 31, 2018, the AUM of the industry has crossed Rs 25 lakh crore. While the AUM has grown multiple times, the benefit of economies of scale has not been fully shared with the investors, the SEBI said.

Further, the slab-wise limits of TER introduced in 1996 under SEBI (Mutual Funds) Regulations, 1996 have not been changed since then.

It is also observed that over a period of time, there have been varying practices in the industry with respect to charging of expenses and payment of commissions. SEBI undertook an internal study to review the TER.

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Staff Writer

This article is written by RupeeIQ editorial staff.