Securities and Exchange Board of India (SEBI) has proposed a uniform total expense ratio (TER) across mutual fund schemes in an attempt to bring in transparency in the costs charged to customers. The market regulator currently allows asset management companies (AMCs) to charge mutual fund holders four additional types of charges above TER. These are brokerage and transaction costs, additional TER for distribution commission for inflows from B-30 (beyond top 30) cities, goods and services taxes and additional 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.
Existing TER
Proposed TER
Mutual Fund industry Growth
NSE Nifty 50 has recorded a three fold increase (from 5,296 to 17,359) between March 31, 2012 to March 31, 2023 while the Mutual Fund industry witnessed an over six-fold increase in its AUM from Rs 6 lakh crore to Rs 39 lakh crore. Similarly the number of unique investors as on March 31, 2023 (3.77 crores) was 2.94 times the number of unique investors as on March 31, 2017 (1.28 crores).
Small AMCs continue to be loss making entities
According to data compiled by SEBI, there is an increase of 173% and 93.25% in the profits made by Large AMCs and Medium AMCs respectively, during the period between FY 2016-17 and FY 2021-22. While 3 Medium AMCs turned from loss to profit making entities FY 2016-17 to FY 2021-22, all Large and Medium AMCs were in profit in FY 2021-22. At an aggregate level, the data indicates that the profit before tax for Small AMCs also grew except in FY 2019-20. However, 12 of the 24 small AMCs had incurred losses during FY 2019-20 and FY 2020-21. SEBI further noted that 20% of the AMCs are presently managing around 75% of the industry AUM and many of the small AMCs continue to be loss making entities, so the revised TER slabs will ensure small AMCs are not at a disadvantage.
Why TER needs to be revised?
The Total Expense Ratio should be inclusive of the total expenses charged to investors at any point of time. But at present certain additional expenses are being charged over and above the TER. “It is desirable that 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.
Additional expense of 5 bps having provision of exit load may be discontinued
AMCs can currently charge additional 5 bps to the scheme even if there is no claw back/exit load credited to the scheme. So considering that for more than 10 years AMCs have been permitted to charge additional expenses, SEBI proposed that the provision enabling charging of additional expense of 5 bps for schemes having provision of exit load, may be discontinued.
TER may be inclusive of GST on investment and advisory fees
GST is a statutory indirect tax which is not under the control of the AMCs, considering the overall intent of increasing transparency in expenses charged to unitholders by making TER inclusive of all charges, SEBI proposed that TER may be inclusive of GST on investment and advisory fees also.