Sebi proposes uniform total expense ratio for mutual funds

Noting the underlying principle that TER should be inclusive of all costs charged to an investor, Sebi proposed that brokerage and transaction expenses may be included within the TER limit.

The TER is a percentage of a scheme's corpus that a mutual fund house charges towards expenses including administrative and management.

Capital markets regulator Sebi on Thursday proposed a uniform total expense ratio (TER) across mutual fund schemes in a bid to bring in transparency in the costs charged to unitholders.

At present, Sebi allows asset management companies to charge unitholders of mutual fund four additional type of expenses over and above the specified TER limits. These are brokerage and transaction costs, additional TER for distribution commission for inflows from B-30 (beyond top 30) cities, good and services taxes and addition expense for exit loads.

The TER is a percentage of a scheme's corpus that a mutual fund house charges towards expenses including administrative and management.

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"TER reflects the maximum expense ratio that an investor may have to pay and hence it should be inclusive of all the expenses permitted to be charged to an investor and the investor should not be charged any amount over and above the prescribed TER limits," Sebi said in its consultation paper.

Noting the underlying principle that TER should be inclusive of all costs charged to an investor, Sebi proposed that brokerage and transaction expenses may be included within the TER limit. Besides, all expenses and costs of investment including STT (Securities Transaction Tax) should be within the TER limit.

Also, Sebi suggested that additional commission to distributors may continue for inflows from B30 cities. The distributors may be paid only for investment from new individual investors (new PAN) from B-30 cities at the industry level.

Sebi suggested that AMCs design their distribution commission policy with an intent to promote financial inclusion and reward inflows from B-30 cities. In this regard, AMCs can consider paying a higher percentage of commission for inflows from B-30 cities as compared to commission for inflows from T-30 (top 30) cities.

Further, Sebi proposed that the provision enabling charging of additional expense of 5 basis points for schemes having provision of exit load, may be discontinued. For more than 10 years AMCs have been permitted to charge additional expenses.

The limits on TER have been proposed to be kept at AMC level and inclusive of all costs and expenses including GST on management fees, brokerage and transaction costs, B-30 incentive etc.

Considering that 20 per cent of the AMCs are presently managing around 75 per cent of the industry AUM and many of the small AMCs continue to be loss making entities, Sebi proposed revised TER slabs, ensuring small players are not at a disadvantage, and to encourage competition amongst AMCs of all sizes.

The regulator has suggested that there should be uniformity in charging of each and every expense to the investor of regular plan and direct plan and the only difference between the TER of regular plan and direct plan should be the expenses towards distribution commission.

The Securities and Exchange Board of India (Sebi) has sought comments on the proposals till June 1.

Among other proposals, Sebi suggested that unitholders should be given an option to exit at the prevailing net asset value (NAV) without any exit load when there is an increase in TER and proposed to lower the exit load of an open ended scheme to a maximum permissible limit of 2 per cent.

In addition, it has been recommended that payment of upfront commission by investor directly and transaction costs deductible from investments of investors, should not be allowed.

For financial inclusion of women in the mutual fund space, Sebi suggested an additional incentive may be introduced for distributors for new investments from women investors (new PAN) at the industry level.

Currently, there are 42 players in the mutual fund industry that manages asset base of over Rs 40 lakh crore.

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