The capital markets regulator SEBI (Securities Exchange Board of India) has released a consultation paper to review the total expense ratio (TER) charged by fund houses from mutual fund investors.
This is being done in a bid to enable greater transparency and accrual of benefits of economies of scale to investors.
The regulator has released a slew of proposals. One of these include the TER limit to be inclusive of all expenses and charges.
“As mutual funds are currently permitted to charge four additional types of expenses over and above the specified TER limits. The TER should be inclusive of the total expenses charged to investors at any point of time,” states one of the proposals.
Other proposals mentioned in the consultation paper include additional commission to distributors for inflows from B-30 cities and removal of additional expense for schemes having provision of exit load, among others.
“Considering that for more than 10 years AMCs have been permitted to charge additional expenses, it is proposed that the provision enabling charging of additional expense of 5 bps for schemes having provision of exit load, may be discontinued,” states one of the proposals in the paper.
The regulator attributes the intent to examine the TER to the rapid pace with which the mutual fund industry has grown in the past few years, particularly since the last review was done in 2018-19.
Between Mar 31, 2012 to Mar 31, 2023, while there was a threefold increase in Nifty50 (from 5,296 to 17,359), the mutual fund industry witnessed an over six-fold increase in its AUM from ₹6 lakh crore to ₹39 lakh crore, reads the SEBI consultation paper.
The markets regulator has reviewed the provisions relating to fees and expenses charged by the mutual funds in the past also. In 2012, for instance, the regulator introduced fungibility in total expense ratio (TER) within existing slabs.
Another review was carried out in 2018-19 where additional measures were introduced including review of TER slabs and additional expense in schemes having provision of exit load.
Now that the industry's assets under management (AUM) rose almost twofold since the last review in FY 2018-19 to nearly ₹39 lakh crore in Mar 2023, the regulator found it appropriate to review the TER again.
“Based on the detailed study and findings of Mutual Funds, a need has been felt for further streamlining of provisions relating to TER and therefore the matter was placed before the Mutual Fund Advisory Committee (MFAC) in Jan 2023,” says the proposal.
As of now AMCs are permitted to charge TER according to a slab. This rate ranges between 1.05 percent to 2.25 percent based on the size of the fund. The larger the fund size, the lower the TER.
There are, however, four additional expenses that AMCs can charge over and above these expense limits.
1. Brokerage and transaction costs
2 Expenses not exceeding 0.30 percent of daily net assets subject to new inflows from B-20 cities.
3. Additional expenses not exceeding 0.05 percent of daily net assets for the schemes having provision of exit load.
4.GST on investment and advisors’ fees charged by the AMCs.
There are a total of 15 consultations highlighted in this consultation paper. And the regulator has invited public’s comments for the same which can be sent latest by June 1, 2023.