SEBI lowers fee cap for mutual funds, likely to benefit lakhs of investors
In a move that is expected to benefit lakhs of investors, 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 costs of managing and operating the fund. The reduction, although modest at just 15 basis points, is likely to result in significant savings for investors over the long term.
The new regulations announced by SEBI state that the TER will now comprise three components: the base expense ratio, brokerage, and statutory levies. This bifurcation of the TER into its component units is expected to bring more transparency to the fees charged by mutual fund companies. While the cut in the TER may not seem significant at first glance, it is likely to have a positive impact on the returns earned by investors.
To understand the impact of the reduction in TER, it is essential to know how it works. The TER is a fee that is deducted from the net asset value (NAV) of the mutual fund on a daily basis. The NAV is the total value of the fund’s assets minus its liabilities, divided by the number of units outstanding. The TER is used to cover the costs of managing the fund, including the fees paid to the fund manager, distributors, and other service providers.
The reduction in the TER will result in a lower deduction from the NAV, which means that investors will earn higher returns on their investments. For example, if an investor invests Rs 1 lakh in a mutual fund with a TER of 2.5%, the fund will deduct Rs 2,500 as fees, leaving the investor with a balance of Rs 97,500. If the TER is reduced to 2.35%, the fund will deduct Rs 2,350 as fees, leaving the investor with a balance of Rs 97,650. Over the long term, these small savings can add up to significant amounts.
The bifurcation of the TER into its component units is also expected to bring more transparency to the fees charged by mutual fund companies. Currently, the TER is a single fee that encompasses all the costs of managing the fund. By breaking it down into its component units, investors will be able to see exactly how much they are paying for each service. This will enable them to make more informed decisions about their investments and to compare the fees charged by different mutual fund companies.
While the reduction in the TER is a positive move, it is essential to note that it may not result in lower fees for all investors. In some cases, the bifurcation of the TER into its component units may result in the overall fee remaining unchanged. This is because the reduction in the base expense ratio may be offset by an increase in brokerage or statutory levies. However, even in such cases, the increased transparency will enable investors to make more informed decisions about their investments.
The reduction in the TER is also expected to increase competition among mutual fund companies. With the fees charged by these companies now more transparent, investors will be able to compare the costs of different funds and choose the ones that offer the best value for money. This increased competition is likely to result in lower fees and better returns for investors over the long term.
In conclusion, the reduction in the TER announced by SEBI is a positive move that is likely to benefit lakhs of investors. While the cut may seem modest at just 15 basis points, it is expected to result in significant savings for investors over the long term. The bifurcation of the TER into its component units will also bring more transparency to the fees charged by mutual fund companies, enabling investors to make more informed decisions about their investments. As always, it is essential for investors to carefully evaluate the fees charged by mutual fund companies and to choose the ones that offer the best value for money.
About the Author
