Tuesday, September 18, 2018, shall be marked as Diwali.

Well, this is not the Diwali you are thinking of, this is the festival, particularly for the investing community.

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The market regulator came up with a circular that has instructed the Asset Management Companies (AMCs) to reduce their expense ratios.

What has happened?

Securities and Exchange Board of India (SEBI) during its board meeting conducted on September 18, 2018, announced a major change with respect to the Total Expense Ratio (TER) of mutual funds.

This is aimed at bringing a higher degree of transparency in the appropriation of expenses, while reducing mis-selling and churning.

Other changes that were announced during the meeting are detailed as under

1.Transparency in expenses

All expenses including commission shall be paid from the mutual fund scheme and not from other sources such as the fund house/its sponsor or Trustee.

In addition, the regulator has also instructed the AMCs not to offer any commission upfront and switch to trail method.

2. 30 bps for penetration beyond top 30 cities

The regulator also announced additional expenses for penetrating in cities beyond top-30 cities where inflows are based from retail investors.

This incentive should be again paid as the trail.

3. Adequate disclosures of performance

 SEBI has directed AMCs to incorporate adequate disclosure, for all schemes, including scheme returns (category wise) vis-à-vis its benchmark (total returns), shall be made available publicly.

What is TER?

TER stands for the Total expense ratio.

It is the expense that AMCs charge from the investors’ and comprises of management cost, overhead cost, other costs incurred while managing the fund.

TER is different for different categories of the fund.

SEBI regulates the expense structure of AMCs and has thus capped the expense at an upper level beyond which AMCs cannot charge expenses.

What is the revised TER?

 

The TER is as follows:

Closed-ended funds  

  • For equity related funds, the TER is capped at 1.25 percent
  • For funds other than equity funds, the TER is capped at 1 percent
  • For index funds and Exchange-Traded funds (ETFs), the cap is 1per cent
  • For fund of funds, the TER is capped at twice of the maximum TER of underlying funds

Open-ended funds

 For open-ended funds, the TER will also factor in the assets under management (AUM).

The following details the expense ratio for such funds :

AUM (Rs Crore) TER for equity scheme TER for non-equity scheme
0-500 2.25 2.00
500-750 2.00 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 increase of Rs 5,000 crore in AUM TER reduction of 0.05% for every increase of Rs 5,000 crore in AUM
>50000 1.05 0.80

Why is it important to you?

We believe an investor can now look forward to the revised rates from AMCs while purchasing any fund unit.

The new framework with respect to TER may cause some disruption in the short-term but it is likely to increase the returns for investors thereby translating to a higher degree of interest.

Following are the implications of the move

1.For AMCs

The cost charged by the AMCs are likely to decline, thus the margins are likely to see downward movements.

2.For investors

Due to the lower expense ratio, the returns from the funds are likely to move north.This shall make mutual funds more attractive as compared to any other instrument available in India currently.

 3.For distributors

Due to reducing commission and trail method for the commission, the entry barriers for distributors’ are likely to increase.

Where to find the expense ratio?

 For every mutual fund, the total expense ratio is available on the website of each of AMC.In addition, you can explore funds in Groww’s platform where you can get the expense ratio.

Happy Investing!