Sebi makes investing in Mutual Funds cheaper; puts cap on total expenses

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New Delhi | December 17, 2018 7:39 PM

In a major overhaul of the fee structure that mutual funds charge from investors, markets regulator Sebi has issued new norms to cap total expenses for investment in such funds at 2.25 per cent.

Sebi, Mutual Funds, investing in MF cheaper, total expense ratio, TER,  MF industry, mutual fund regulationsThe regulator has capped the maximum TER for closed-ended equity schemes at 1.25 per cent, and other than equity schemes at 1 per cent.

In a major overhaul of the fee structure that mutual funds charge from investors, markets regulator Sebi has issued new norms to cap total expenses for investment in such funds at 2.25 per cent. Rationalising the total expense ratio (TER), the fee that mutual funds (MF) collect from investors every year to manage their money, Sebi said the new fee structure would come into force from April 1, 2019. The move comes after the board of Sebi cleared a proposal in this regard in September.

The regulator has capped the maximum TER for closed-ended equity schemes at 1.25 per cent, and other than equity schemes at 1 per cent. The maximum TER for open-ended equity schemes will be 2.25 per cent, and 2 per cent for other open-ended schemes, the Securities and Exchange Board of India (Sebi) said in a notification dated December 13.

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TER is a percentage of a scheme’s corpus that a MF house charges towards expenses, including administrative and management. The TER was introduced in 1996 and since then, it has not been changed. Over a period of time, there have been varying practices in the industry with respect to charging of payments and commissions. With regard to open-ended equity schemes, Sebi said that the highest expense ratio allowed to be charged for the first Rs 500 crore of assets will be 2.25 per cent.

As AUM increase, the expense ratio will have to come down. For the next Rs 250 crore, it will be 2 per cent; for further Rs 1,250 crore, it will be 1.75 per cent; for the next Rs 3,000 crore, the fee will be 1.6 per cent; and again on the next Rs 5,000 crore of the daily net assets, the charge will be 1.5 per cent.

In the case of equity mutual funds with the daily net assets of Rs 40,000 crore, Sebi said that total expense ratio will be a decline of 0.05 per cent for every increase of Rs 5,000 crore of daily net assets. According to Sebi, equity schemes will have to invest a minimum of 65 per cent of its net assets in equity and equity-related instruments. The regulator has made amendments to the Sebi’s MF regulations. The 42-member strong MF industry manages assets of Rs 24 lakh crore, as of November-end this year.

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