When less is more!! Your Cost of Investing In Mutual Funds to Come Down

SEBI plans a major overhaul of the fee structure or Total Expense Ratio that mutual funds charge from their investors. Large equity funds like ICICI Bluechip, SBI Bluechip etc in particular will be most impacted and become cheaper to own. These changes with new fee structure will come into force from new financial year i.e. 1 April 2019

These changes will affect crores of investors who have / will invest in mutual funds. This is customer centric move by SEBI which will improve overall yields especially for retail investors.

What is Total Expense Ratio (TER)

The Total Expense Ratio (TER) is a measure of the total cost to the investor. Costs may include various fees (purchase, redemption, auditing) and other expenses. The TER is calculated by dividing the total annual cost by the fund's total assets averaged over that year.

Typically it consists of the annual management charge (AMC), the fee that the fund company charges annually to manage the fund (typically commission paid to fund managers), plus 'other' charges incurred with running the fund. These other charges can consist of share registration fees, fees payable to auditors, legal fees, and custodian fees. Not included in the total expense ratio are transaction costs as a result of trading of the fund's assets.

The regulator has capped maximum TER for closed-ended equity schemes at 1.25% and other than equity schemes (close ended) at 1%. Equity schemes need to invest a minimum of 65% of its net assets in equity and equity-related instruments.

Similarly, maximum TER for open-ended equity schemes will be 2.25%, and 2% for other open-ended schemes.

On open-ended equity schemes, expense ratio that will be allowed for the first Rs 500 crore of assets will be 2.25%. As the AUM increases, the expense ratio will have to come down.

For the next Rs 250 crore, it will be 2%; for further Rs 1,250 crore, it will be 1.75%; for the next Rs 3,000 crore, the fee will be 1.6%; and again on the next Rs 5,000 crore of the daily net assets, the charge will be 1.5%. 

AUM Slab (Rs in crore)	TER limits  equity-oriented schemes	TER limits other schemes
first Rs 500 crores of the daily net assets	2.25%	2.00%
On the next Rs 250 crores of the daily net assets	2.00%	1.75%
On the next Rs 1,250 crores of the daily net assets	1.75%	1.50%
on the next Rs 3,000 crores of the daily net assets	1.60%	1.35%
On the next Rs 5,000 crores of the daily net assets	1.50%	1.25%

In the case of equity mutual funds with the daily net assets of Rs 40,000 crore, SEBI said that total expense ratio will be a decline of 0.05 percent for every increase of Rs 5,000 crore of daily net assets.

In case of index funds, ETFs, FoFs, and liquid funds, the TERs, including the weighted average of the total expense ratio levied by the underlying scheme(s), is limited to 1.00% of the daily net assets of the scheme.

SEBI said the new fee structure would come into force from 1st April 2019. These changes will directly impact investors as their net returns after expense will be higher to the extent of the cut proposed. As they say "a penny saved is a penny earned" these developments are positive in long term for investors of both equity as well as debt.

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News inputs ET/ personalfn              What is TER : Source Wikipedia