In September, in its board meeting, SEBI announced slashing of Total Expense Ratio (TER) of Mutual Funds. This decision is attributed to bring transparency in the appropriation of expenses, curb miss-selling and churning. The decision has been taken upon considering the economies of scale. The result of this will make mutual funds cheaper and transparent for investors.
Sumit Bose Committee
SEBI was asked by the Finance Ministry to implement the recommendations of Sumit Bose Committee. The recommendations include doing away with the practice of upfront commission, an introduction of reducing AUM based trail commission, levelling commission across T15 and B15 distributors and disclosing trail commission to investors at the time of sale. The difference between the expenses ratio of direct and regular funds is only to the tune of distributors commission only.
In addition to the standard disclosure of mutual funds are subject to market risks, the fund house is required to state that the fund’s performance is subject to fund house/manager’s competence and inform the investors when a fund manager changes.
Currently, the AUM rankings are based on all products combined, giving a misleading picture. Therefore, it is recommended by the committee that retail AUM ranking should include only that of retail products.
Total Expense Ratio
For close-ended and Interval Equity-oriented funds a maximum Total Expense Ratio (TER) shall be 1.25% and for other equity-oriented funds, it shall be maximum of 1.%. And, for ETFs and FoFs– maximum of 1%.
FoFs investing primarily in Liquid, Index and ETF schemes – maximum 1%.
FoFs investing primarily in active underlying schemes – 2.25% for equity oriented funds and 2% for other than equity oriented funds.
For penetration into B30 cities, an additional expense of 30bps is permitted, through trail only.
|AUM (Rs crore)||TER for equity-oriented schemes (%)||TER for other schemes (excl. Index, ETFs and Fund of Funds)|
|0 – 500||2.25||2|
|500 – 750||2||1.75|
|750 – 2,000||1.75||1.5|
|2,000 – 5,000||1.6||1.35|
|5,000 – 10,000||1.5||1.25|
|10,000 – 50,000||TER reduction of 0.05% for every increase of 5,000 crore AUM or part thereof||TER reduction of 0.05% for every increase of 5,000 crore AUM or part thereof|
No Upfront Commissions
Commissions and expenses are to be paid from the fund only and not from the AMC. The commissions’ payout has to follow a full trail commission model rather than upfront commission or up fronting of any trail commissions.
Does a lower Total Expense Ratio assure higher returns from mutual funds?
No, a study done by economic times has shown that there is no relation between the returns and expense ratio of the funds. For example, Axis Bluechip fund has been the top performer in the large-cap category with 2.53% as its expense ratio. This is higher than the average Total Expense Ratio (TER) of 2.48% of the category. Similar trends were observed across other categories as well, concluding no concrete relation between returns and expenses. Overall, the reduction in Total Expense Ratio (TER) will benefit investors but doesn’t impact the fund’s performance.