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 fee structure of mutual funds, which is expected to benefit lakhs of investors in the country. The total expense ratio (TER), which is the fee charged by mutual fund companies, will now comprise three components: base expense ratio, brokerage, and statutory levies. This move is aimed at increasing transparency and reducing the overall cost of investing in mutual funds.
The TER is a critical factor in determining the net returns of a mutual fund scheme. It includes various expenses such as management fees, administrative costs, and marketing expenses. The SEBI has reduced the TER by 10-15 basis points, which may seem like a small change, but it can have a significant impact on the returns of investors. A basis point is one-hundredth of a percentage point, so a 15 basis point reduction in TER means that the mutual fund company will now charge 0.15% less as fees.
To understand the impact of this change, let’s consider an example. Suppose an investor invests Rs 1 lakh in a mutual fund scheme with a TER of 2.5%. If the scheme generates a return of 10% per annum, the investor will earn Rs 10,000 as returns. However, the mutual fund company will deduct Rs 2,500 (2.5% of Rs 1 lakh) as TER, leaving the investor with a net return of Rs 7,500. If the TER is reduced by 15 basis points, the new TER will be 2.35%, and the investor will save Rs 150 (0.15% of Rs 1 lakh) in fees. This may not seem like a lot, but for lakhs of investors, this can add up to a significant amount over time.
The bifurcation of the TER into its component units is also expected to bring more transparency to the mutual fund industry. Investors will now be able to see exactly how much they are paying in fees and what they are getting in return. This will enable them to make more informed decisions about their investments and choose schemes that offer better value for money.
However, it’s worth noting that the reduction in TER may not necessarily lead to a decrease in the overall fee charged by mutual fund companies. In some cases, the base expense ratio may remain the same, and the reduction in TER may be offset by an increase in brokerage or statutory levies. This means that the overall fee charged by the mutual fund company may remain unchanged, despite the reduction in TER.
Despite this, the move by SEBI is a step in the right direction. It will increase transparency and accountability in the mutual fund industry, which is essential for protecting the interests of investors. The reduction in TER will also put pressure on mutual fund companies to reduce their costs and improve their efficiency, which can lead to better returns for investors.
In recent years, the mutual fund industry has experienced significant growth, with lakhs of new investors entering the market. However, many of these investors are not aware of the fees and charges associated with mutual fund investments. The reduction in TER and the bifurcation of the TER into its component units will help to educate investors about the costs associated with mutual fund investments and enable them to make more informed decisions.
In conclusion, the reduction in TER by SEBI is a welcome move that is expected to benefit lakhs of investors in the country. While the reduction may seem small, it can have a significant impact on the returns of investors over time. The bifurcation of the TER into its component units will also bring more transparency to the mutual fund industry, which is essential for protecting the interests of investors. As the mutual fund industry continues to grow, it’s essential to ensure that investors are aware of the fees and charges associated with mutual fund investments and can make informed decisions about their investments.
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