SEBI lowers fee cap for mutual funds, likely to benefit lakhs of investors
The Securities and Exchange Board of India (SEBI) has announced a significant change in the way mutual fund companies charge their investors. As of recently, the total expense ratio (TER), which is the fee charged by mutual fund companies to manage investors’ money, will now comprise three components: base expense ratio, brokerage, and statutory levies. This change is expected to benefit lakhs of investors in the country, who will now be able to save more on their investments.
The TER is a critical component of mutual fund investing, as it directly affects the returns that investors earn on their investments. A lower TER means that investors get to keep more of their returns, rather than paying it out as fees to the mutual fund company. In this context, the SEBI’s decision to cut the TER by 15 basis points (bps) is a welcome move. Although the cut may seem small, it is expected to have a significant impact on the overall savings of investors.
To understand the impact of this change, it’s essential to know how the TER is calculated. The TER is a percentage of the total assets under management (AUM) of a mutual fund scheme. It includes various expenses such as management fees, distribution fees, registrar and transfer agent fees, and other operational expenses. The TER is deducted from the net asset value (NAV) of the mutual fund scheme on a daily basis, which means that investors are charged the TER on their investments every day.
The bifurcation of the TER into its component units is a significant aspect of the SEBI’s decision. By breaking down the TER into base expense ratio, brokerage, and statutory levies, mutual fund companies will now be required to disclose the exact amount of fees that they charge to investors. This increased transparency will enable investors to make more informed decisions about their investments, as they will be able to see exactly how much they are paying in fees.
While the cut in TER may not seem significant, it is expected to benefit lakhs of investors in the country. For example, an investor who invests Rs 1 lakh in a mutual fund scheme with a TER of 2% will now pay Rs 1,985 in fees per year, compared to Rs 2,000 earlier. This may not seem like a lot, but for investors who have large portfolios or who invest regularly, the savings can add up quickly.
Moreover, the SEBI’s decision to cut the TER is expected to increase transparency in the mutual fund industry. By requiring mutual fund companies to disclose the exact amount of fees that they charge, the SEBI is promoting a culture of transparency and accountability. This will enable investors to compare the fees charged by different mutual fund companies and make informed decisions about their investments.
It’s worth noting that the cut in TER may not necessarily mean that investors will see a reduction in the overall fees that they pay. In some cases, the bifurcation of the TER into its component units may result in the overall fee remaining unchanged. For example, if a mutual fund company was earlier charging a TER of 2%, which included a base expense ratio of 1.5% and brokerage and statutory levies of 0.5%, the company may now charge a base expense ratio of 1.35% and brokerage and statutory levies of 0.65%. In this case, the overall fee remains unchanged, but the investor now has more transparency into the exact amount of fees that they are paying.
In conclusion, the SEBI’s decision to cut the TER by 15 bps is a welcome move that is expected to benefit lakhs of investors in the country. The bifurcation of the TER into its component units will increase transparency in the mutual fund industry, enabling investors to make more informed decisions about their investments. While the cut in TER may seem small, it is expected to have a significant impact on the overall savings of investors. As the mutual fund industry continues to grow and evolve, it’s essential for investors to stay informed about the changes that are taking place and to make informed decisions about their investments.
About the Author
