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.
As per the new regulations, the TER will now comprise three components: base expense ratio, brokerage, and statutory levies. While the cut in the TER may seem modest, at just 15 basis points, it is likely to result in significant savings for investors over the long term. Moreover, the bifurcation of the TER into its component units is expected to bring more transparency to the fee structure, allowing investors to make more informed decisions about their investments.
The TER is a critical component of the overall cost of investing in mutual funds. It is deducted from the fund’s assets on a daily basis, and can have a significant impact on the returns earned by investors. A lower TER means that investors get to keep more of their returns, which can add up to a substantial amount over the long term.
For example, assume that an investor has invested Rs 1 lakh in a mutual fund with a TER of 2%. If the fund generates returns of 12% per annum, the investor would earn Rs 12,000 in returns, but would have to pay Rs 2,000 as TER, leaving them with a net return of Rs 10,000. If the TER is reduced to 1.85%, the investor would pay Rs 1,850 as TER, resulting in a net return of Rs 10,150. This may not seem like a significant difference, but over the long term, the savings can add up to a substantial amount.
The reduction in the TER is also expected to make mutual funds more competitive with other investment products, such as exchange-traded funds (ETFs) and index funds. These products have been gaining popularity in recent years, due to their lower cost structure and ability to track the performance of a particular index or sector. By reducing the TER, mutual funds can become more attractive to investors who are looking for a low-cost investment option.
It is worth noting that the bifurcation of the TER into its component units may not necessarily result in a reduction in the overall fee paid by investors. In some cases, the base expense ratio, brokerage, and statutory levies may add up to the same amount as the previous TER, leaving the overall fee unchanged. However, this transparency is still beneficial for investors, as it allows them to see exactly what they are paying for, and make more informed decisions about their investments.
The move by SEBI to reduce the TER is part of a broader effort to increase transparency and accountability in the mutual fund industry. In recent years, the regulator has taken several steps to protect the interests of investors, including introducing new rules for the valuation of securities, and increasing the disclosure requirements for mutual funds.
Overall, the reduction in the TER is a positive development for investors in the mutual fund industry. While the cut may seem modest, it is likely to result in significant savings for investors over the long term. Moreover, the bifurcation of the TER into its component units is expected to bring more transparency to the fee structure, allowing investors to make more informed decisions about their investments.
In conclusion, the SEBI’s decision to lower the fee cap for mutual funds is a welcome move that is likely to benefit lakhs of investors in the country. The reduction in the TER, combined with the bifurcation of the TER into its component units, is expected to make mutual funds more competitive with other investment products, and provide investors with more transparency and accountability.
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