SEBI lowers fee cap for mutual funds, likely to benefit lakhs of investors
In a move that is expected to benefit lakhs of investors in the country, the Securities and Exchange Board of India (SEBI) has announced a reduction in the total expense ratio (TER) charged by mutual fund companies. The TER, which is a percentage of the fund’s assets, is used to cover the various expenses incurred by the mutual fund, including management fees, distribution fees, and other operational costs. The reduction in TER is expected to result in lower fees for investors, which could translate into higher returns on their investments.
According to the new guidelines announced by SEBI, the total expense ratio will now comprise three components: base expense ratio, brokerage, and statutory levies. The base expense ratio will include all the expenses related to the management of the fund, such as investment management fees, administrative costs, and other operational expenses. The brokerage component will include the costs associated with buying and selling securities, while the statutory levies will include taxes and other regulatory fees.
The reduction in TER has been pegged at 10-15 basis points, which may seem like a small cut, but it is expected to have a significant impact on the investments of lakhs of investors. A basis point is one-hundredth of a percentage point, so a 15 basis point reduction in TER means that if the TER was 1.5% earlier, it will now be 1.35%. This reduction may not seem like a lot, but it can add up to a significant amount over the long term, especially for investors who have large investments in mutual funds.
The bifurcation of TER into its component units is also expected to bring more transparency to the fees charged by mutual fund companies. Earlier, the TER was a single, all-encompassing figure that included all the expenses incurred by the mutual fund. By breaking it down into its component units, investors will now be able to see exactly how much they are paying for each component of the TER. This increased transparency is expected to help investors make more informed decisions about their investments and to compare the fees charged by different mutual fund companies.
While the reduction in TER is expected to benefit lakhs of investors, it may not necessarily result in lower fees for all investors. In some cases, the bifurcation of TER into its component units may actually result in the overall fee remaining unchanged. This is because the reduction in the base expense ratio may be offset by an increase in the brokerage or statutory levies component. However, even in such cases, the increased transparency is expected to benefit investors by giving them a clearer understanding of the fees they are paying.
The reduction in TER is also expected to increase the competitiveness of the mutual fund industry. With the fees charged by mutual fund companies now more transparent, investors will be able to compare the fees charged by different companies and choose the one that offers the best value for their money. This increased competition is expected to drive down fees further, which will benefit investors even more.
In addition to the reduction in TER, SEBI has also announced other measures to increase transparency and accountability in the mutual fund industry. These measures include the introduction of a new format for the presentation of expenses in the mutual fund’s annual report, which will provide more detailed information about the expenses incurred by the fund. SEBI has also announced plans to introduce a new system for the disclosure of portfolio holdings, which will provide investors with more information about the securities held by the mutual fund.
Overall, the reduction in TER announced by SEBI is a welcome move that is expected to benefit lakhs of investors in the country. While the reduction may seem small, it is expected to have a significant impact on the investments of lakhs of investors over the long term. The increased transparency and accountability introduced by SEBI are also expected to benefit investors by giving them more information about the fees they are paying and the investments they are making.
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