A major change introduced by SEBI last year changed the business model of fund houses and distributors. SEBI has introduced a chain of changes during the last fiscal year with regards to the total expense ratio (TER). Major changes were made to the total expense ratio, transparency in expenses and rationalizing the commission structure.
Reduction in slab wise TER for equity-oriented funds
To pass on the benefits of economies of scale, SEBI has reduced the total expense ratios of equity oriented funds and other funds. All funds above AUM of Rs 2,000 crore will see a reduction in TER. And funds below AUM of Rs 2,000 crore will continue to have the same TER. Also, as the fund size increases the reduction in total expense ratio will increase. A fund with Rs 5,000 crore AUM will see an only minor reduction in the TER when compared to a fund with an AUM of Rs 15,000 crore.
Reduction in slab wise TER for other than equity-oriented funds
For funds other than equity the TER slab rates have been modified. Though the change is not much and the funds in this category aren’t affected a lot because all the funds are way below the maximum allowable limits.
While the open-ended funds have seen a cut in TER slab wise, for closed-ended funds the TER is restricted to 1.25% for equity-oriented schemes and 1% for other schemes. SEBI has also laid down ground rules for TERs of ETFs and fund of funds restricting their upper limit.
Rationalizing of commission structure
Another major change SEBI introduced in the TER is the commission structure. To introduce more transparency and clarity on the payout of commissions, SEBI has ordered the industry to adopt full trail commission abolishing upfront commission. In this new structure, the distributor will get a trial commission as long as the investor stays invested in the scheme. This move will surely benefit investors and distributors will be encouraged to instill long term investing culture in their clients. However, for SIPs the upfront commission is still present so as to encourage SIP investing among investors.
Additional expenses of 30bps for B-30 cities
With respect to the additional expenses changed by fund houses on penetrating B-30 cities, SEBI restricted that the additional charges will be on inflows only from retail investors and not from inflows of corporates or institutions.
Reduction in the total expense ratio
Changes made by SEBI is clearly reflected in the TERs of funds. Below is a table comparing the TERs of major funds in August 2018 and April 2019. Also, the total expense ratio has come down by 40 bps on an average.
|Fund Name||TER in August 2018||TER in April 2019||Difference|
|HDFC Balanced Advantage Fund||2.25%||1.79%||0.46%|
|SBI Equity Hybrid Fund||2.39%||1.94%||0.45%|
|Kotak Standard Multicap Fund||2.03%||1.74%||0.29%|
|Aditya Birla Sun Life Frontline Equity Fund||2.18%||1.98%||0.20%|
|Axis Long Term Equity Fund||2.25%||1.77%||0.48%|
Clearly, investors have benefitted from this step taken by SEBI. The total expense ratio has come down a lot and the benefits of economies of scale have been passed onto investors. With lesser expense ratios the investors will have higher returns. But with a reduction in TER, the management fees and distributor commission have to come down. It will be better for the asset management companies and distributors to share the burden equally than just passing the entire burden of reduced commission on one party.