The Securities and Exchange Board of India (Sebi ) is considering changing the way mutual funds charge investors for their total expense ratio (TER).
Sebi allows mutual funds to charge investors certain operating expenses for managing mutual fund schemes – including sales and marketing, administrative expenses, transaction costs, and investment management fees, among others. These expenses are collectively referred to as TER.
Sebi is now reportedly considering bringing in changes and standardising a uniform TER across mutual fund schemes in a bid to prevent agents from misleading investors into investing in bad mutual funds, according to a report in The Economic Times.
The proposal came after Sebi discovered that a significant number of new fund offerings (NFOs ) of equity mutual funds have attracted funds from existing mutual fund schemes in recent years. The market regulator doubts that mutual fund distributors might have recommended individual investors to shift their investments from existing schemes to these NFOs that charge more TER. In return, these distributors might have earned higher commission from these NFOs.
Industry estimates indicate that over 20 per cent of assets under management (AUMs) moved to equity NFOs last year.
The changes will now make it mandatory for mutual funds to impose a uniform expense ratio across scheme categories, such as equity or debt.
For instance, fund house have to charge the same expense ratio for all equity funds, regardless of the size or type of the mutual fund. At present, the ratio varies based on the fund size, and even within equities, it varies based on the category, large-, flexi-, or mid-cap fund.
Incidentally, Sebi has been discussing changes to the expense ratio since December 2022, when it initiated a study of fees and expenses charged by mutual funds.
Sebi is of the opinion that TER of mutual funds can be further reduced, thus making them more affordable to mutual fund investors.
At present, the maximum TER chargeable by an equity scheme is 2.25 per cent, according to Sebi’s framework. Also, ever since Sebi changed the regulatory framework for expense ratios in September 2018, the mutual fund industry’s AUM have risen by almost 65 per cent.