Unveil the reasons behind SEBI’s proposed changes in Expense Ratio. Discover how these modifications will shape the future of investors and AMCs.
If you are venturing into the world of mutual funds, understanding the concept of total expense ratio (TER), or expense ratio, is paramount. Why, you ask? Because it directly impacts your profits. When your primary goal is to maximise your returns, paying attention to the factors that influence your bottom line becomes crucial.
Recently, SEBI proposed some changes in the TER. Let’s find out how the proposal will impact investors and the asset management companies (AMCs).
In simple terms, TER represents the overall cost associated with investing in mutual funds. It comprises fees charged by the mutual fund company for their services. The MMC (Mutual Fund Management Company) deducts expenses like registrar fees, distribution commissions, and advertising costs from your profits before passing them on to you.
Additionally, there may be extra expenses beyond the TER, such as brokerage fees, transaction costs, GST, exit loads, and distribution commissions for B-30 cities.
However, the SEBI has proposed some changes in the calculation of TER. These proposed modifications aim to refine the existing framework and warrant our attention.
The New Proposal
SEBI’s proposal suggests a uniform TER across schemes, regardless of the asset size. This implies that all Asset Management Companies (AMCs) will be required to charge the same expense ratio for similar plans.
Presently, each AMC has the flexibility to levy a higher TER based on its scale and brand reputation. The proposal suggests that all permissible expenses should be within the maximum TER limit. This includes expenses like brokerage, securities transaction tax, and GST.
According to SEBI, the only disparity between the Regular Plan Expense and the Direct Plan Expense should be the distribution commission charge. This move aims to establish parity between the two schemes while enhancing transparency and eliminating hidden or additional costs for unit holders.
What Prompted SEBI to Introduce This Proposal?
SEBI identified that investors were being subjected to double charges, as they were bearing research-related costs in addition to management and advisory fees. Furthermore, SEBI argues that certain schemes were incurring expenses exceeding the prescribed TER limit for brokerage and transaction costs, resulting in higher investor expenses.
The New Slabs
Under the proposed slab structure, the following TER limits will be implemented:
- For AMCs with assets under management (AUM) up to Rs 2,500 crore: Maximum TER of 2.55% for a regular plan.
- For AMCs with AUM ranging from Rs 2,500 crore to Rs 5,000 crore: Maximum TER of 2.45% for a regular plan.
- For AMCs with AUM above Rs 5,000 crore: Maximum TER of 2.30% for a regular plan.
Additionally, for every increase of Rs 5,000 crore in daily net assets beyond Rs 50,000 crore, there will be a reduction of 0.05% in the maximum TER.
The uniform TER offers benefits to investors by potentially reducing their expenses. It enhances comparability between different plans, enabling informed investment decisions. Moreover, it promotes transparency and helps minimise hidden charges for investors.
How Will it Impact AMCs?
AMCs are likely to experience a direct impact from the proposed changes. According to Economic Times, the mutual fund sector’s net profitability could decline by up to 27%.
If approved, the proposal may lead to a scenario where investors benefit while AMCs face challenges. It’s worth noting that public comments on the proposal can be submitted until 8th June, allowing for further evaluation and potential adjustments.
That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!
*The article is for information purposes only. This is not investment advice.