Good news for investors, Sebi caps mutual funds' annual expense fees

Mutual funds' investor fees will be capped at 2.25 per cent of total expenses, according to new norms issued by markets regulator Sebi.

Sebi’s new fee structure will come into effect from April 1, 2019 and it will rationalise the total expense ratio (TER), the fee that mutual funds (MF) collect from investors every year to manage their money.

The regulator has capped the maximum TER for closed-ended equity schemes at 1.25 per cent, and other than equity schemes at 1 per cent.

The maximum TER for open-ended equity schemes will be 2.25 per cent, and 2 per cent for other open-ended schemes, Sebi said in a notification dated December 13.

TER is a percentage of a scheme's corpus that a MF charges as expenses, including administrative and management.

TER was introduced in 1996 and since has not been changed then. Over a period of time, there have been varying practices in the industry with respect to charging of payments and commissions.

For open-ended equity schemes, Sebi said the highest expense ratio allowed to be charged for the first Rs 500 crore of assets will be 2.25 per cent. As Asset under Management (AUM) increases, the expense ratio will have to come down.

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

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 per cent for every increase of Rs 5,000 crore of daily net assets.

According to Sebi, equity schemes will have to invest a minimum of 65 per cent of their net assets in equity and equity-related instruments.

The 42-member strong MF industry manages assets of Rs 24 lakh crore, as of November-end this year.