Markets regulator Sebi on Tuesday cleared a proposal to cap the maximum total expense ratio (TER) — the fee that mutual funds (MFs) collect from investors every year to manage their money — for closed ended equity schemes to 1.25% and other than equity schemes to 1%. The maximum TER for open-ended equity schemes will be 2.25%.
The Securities and Exchange Board of India (Sebi), in its board meeting, reduced the TER by 25 basis points in the top slab for both equity and debt funds. It also said that the mutual fund industry must adopt the full-trail model of commission in all schemes without payment of any upfront commission or upfronting of any trail commission.
Sebi announced new slabs of charging TER for equity and debt schemes. For the assets under management (AUM) of up to Rs 500 crore TER for equity-oriented schemes is 2.25%, while for AUM of Rs 500-700 crore it will be 2%, for Rs 750-2,000 crore it will be 1.75% and for Rs 2,000-5,000 crore it will be 1.60%. Schemes having an AUM of Rs 5,000-10,000 will have a TER of 1.50%. For an AUM of Rs 10,000-50,000, the TER reduction will be 0.05% for every increase of Rs 5,000 crore AUM or part thereof, and for assets of over Rs 50,000 crore, the TER will be 1.05%.
Debt funds get charged similarly, but the charges are 25 bps lower for each slabs.
Earlier, Sebi’s MF regulations allowed the first Rs 100 crore of an equity scheme’s net assets get charged at 2.5%, the next Rs 300 crore at 2.25%, the next Rs 300 crore at 2%, and the rest at 1.75%. Debt funds get charged similarly, but the charges are 25 bps lower for each of the slabs. Market participants say that the cost might come down by 20-25 basis for equity open-ended schemes.
Jimmy Patel, MD and CEO at Quantum Asset Management Company, said: “TER has come down and even slabs of AUM have also been change. I think it will benefits investors as costs will come down and returns will increase. All this steps will also lead to more transparency in the industry.” He also added that, going for full train commission will provide annuitised payout for serious distributors.
The MF industry was anticipating some changes in the TER as in the past many occasion regulators had said that cost of mutual funds should come down. However, announcement of adopting the full trail model of commission in all schemes without payment of any upfront commission or upfronting of any trail commission was surprising. Sebi said, “All commission and expenses, etc. shall necessarily be paid from the scheme only and not from the AMC/Associate/ Sponsor/ Trustee, or any other route. A carve out has been provided for upfronting of trail commission in case of systematic investment plans (SIPs) subject to fulfillment of certain conditions.”
Aashish P Somaiyaa, CEO at Motilal Oswal AMC, said, “I think reducing the TER is a positive move as it will add to investor returns. However, on the commission I would say that, even for distributors there are some costs and we need to see how it impacts them. I believe initially, there will be slowdown in the inflows.”
At present, fund houses give upfront commissions from their profits and it is anywhere between 0.75 basis points to 1.25%. While trail commission is around 1%. Several distributors take only trail commissions of 1.5%. Upfront commissions were very high for closed ended equity schemes, and in many cases it went up to 5%. Normally, fund houses pay 3% upfront for close ended equity schemes.
“With the reduction in TER, I think fund houses will also have to lower their trail commissions. If they continue to give high commissions, then it will impact the profits of the fund house,” said a CEO of the leading fund house. Sebi also said that the additional expense permitted for penetration in B-30 cities, shall be based on inflows from retail investors. The definition of ‘retail investors’ shall be determined in consultation with the industry. Pending such clarification, the additional incentive shall be permitted for inflows from individual investors only and not on inflows from corporates and institutions. Further, the B-30 incentive shall be paid as trail only.