The market regulator has decided to lower expenses paid by investors of equity mutual fund schemes.
The total expense ratio will be brought down considering economies of scale, Ajay Tyagi, chairman of the Securities and Exchange Board of India, said in a press conference after the regulator’s board meet where it took a host of decisions.
The change could have a Rs 1,300-1,500 crore impact on the revenue of the mutual fund industry, according to Madhabi Puri Buch, whole-time member at SEBI. Assets under management of the industry are at a record of Rs 25 lakh crore, resulting in a revenue of about Rs 13,000 crore.
Lowering expenses will lead to passing on the benefits of efficiencies to investors, said Aashish Somaiyaa, chief executive officer at Motilal Oswal AMC. The impact, he said, will vary with each asset management company.
This is the second major review of expenses in six years amid a debate on whether Indian mutual funds charge too much. Morningstar in its October 2017 report said India’s average equity expense ratio at 2.22 percent is among the highest in the world. But the Foundation of Independent Financial Advisors, in a separate report, countered that at 1.88 percent, the ratio is the lowest among developing nations.
The regulator accepted one of the proposals suggested by a Mutual Fund Advisory Committee. Here’s how SEBI capped the total expense ratio as a percentage of assets of a scheme:
- TER for closed-ended equity oriented schemes shall be a maximum of 1.25 percent, and for other closed-ended schemes will be a maximum 1 percent.
- TER for index funds and exchange-traded funds will be up to 1 percent.
- In Fund of Funds, the TER will be a maximum of twice of the TER of underlying funds.
- For Fund of Funds investing in liquid, index and ETF schemes, the maximum total TER will be 1 percent.
- For Fund of Funds investing in active underlying schemes, the maximum total TER will be 2.25 percent for equity oriented schemes and 2 percent for other schemes.
TER For Open-Ended Schemes
| AUM Slab (Rs Crore) | TER For Equity Oriented Schemes | "TER For Other Schemes (Excluding Index | ETFs and FoFs)" | |||
|---|---|---|---|---|---|---|
| 0-500 | 2.25% | 2% | ||||
| 500-750 | 2% | 1.75% | ||||
| "750-2 | 000" | 1.75% | 1.50% | |||
| "2 | 000-5 | 000" | 1.60% | 1.35% | ||
| "5 | 000-10 | 000" | 1.50% | 1.25% | ||
| "10 | 000-50 | 000" | "TER reduction of 0.05% for every increase of Rs 5 | 000 crore in AUM" | "TER reduction of 0.05% for every increase of Rs 5 | 000 crore in AUM" |
| "Over 50 | 000" | 1.05% | 0.80% | |||
No Upfront Commissions
In an effort to prevent mis-selling, SEBI also barred mutual funds from paying fees to distributors from their books. Commissions will come from schemes and not the asset management companies, Tyagi said. This was also one of the recommendations of the regulator’s internal study.
The regulator also barred any upfront commissions and said the industry should follow the full-trail model—based on investments by clients. Upfront commissions are allowed in systematic investment plans subject to certain conditions.
“Banning upfront commissions could impact the flows into the mutual fund industry,” Somaiyaa of Motila Oswal AMC said. “For my AMC, this will create a level-playing field as we never used to pay any upfront commissions.”
Swarup Mohanty, chief executive officer at Mirae Asset Global Investments (India) Pvt. Ltd., said his company follows a full-trail brokerage model since 2011. “It is the right form of payout and will ensure longer term partnerships with distribution partners.”
Demand For Parity
Lower expenses and commissions, however, triggered concerns that advisers could push financial products with higher costs and fees.
It’s now important to now being parity between various financial products so that investments are not sold to investors just for higher or upfront fees, according to Nilesh Shah, managing director at Kotak AMC. “Hopefully, other regulators will take the lead from SEBI and bring their products on a par with mutual funds in terms of investor focus.”
Agreed market expert Vijai Mantri. The insurance regulator should also look at rationalising expenses else arbitrage will encourage advisers to sell more insurance products, he said. “Unit-linked insurance plans already enjoy regulatory tax arbitrage compared with mutual funds.”
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