Sebi may bring down expense ratio further

Incentives on mobilising assets from small centres could be done away with

The Securities and Exchange Board of India (Sebi) is likely to lower the ceiling for the total expense ratio (TER) charged by mutual funds (MFs).

The TER is a percentage of a scheme’s corpus that a fund house charges towards administrative, management, and all other expenses.

Sources said Sebi wanted the TER ceiling to be lowered to two per cent from 2.5 per cent. The regulator might further bring it down to 1.5 per cent in phases, sectoral players said.

Sebi is also considering doing away with the incentive programme for garnering assets from smaller cities. Currently, Sebi allows MFs to charge an extra 30 basis points (a basis point is a hundredth of a percentage point) of the TER for garnering assets from beyond the country’s top 15 cities.

Sebi has been consulting industry sectors on bringing down MF costs to help investors. The proposal to reduce the expense ratio is in line with last year’s Sumit Bose committee report.

The expense ratio is the cost per unit incurred to operate a scheme and is charged to the overall assets of the scheme. This cost is recurring and the amount collected is used by asset management companies (AMCs) for marketing products; payments to distributors, the registrar and transfer agents: and fund management fees.

The maximum TER fund houses can charge is 2.5 per cent for equity funds and 2.25 per cent for debt schemes. However, the 2.5 per cent can be charged only on the first Rs 100 crore of the assets of the scheme. Once the scheme size grows, a 2.25 per cent TER is charged on the next Rs 300 crore. On assets above this, the TER cannot be more than 1.75 per cent.

But with added incentives like the 30 basis points (bps) for raising money from beyond the top 15 cities and the additional 20 bps AMCs can charge in lieu of exit loads, the TER climbs to as high as 300 basis points.

Executives in the Rs 14 lakh crore mutual fund industry have a mixed views on lowering the TER. Mutual fund schemes with smaller asset sizes will be hit the most. And there will be pressure on fund houses to increase the size of schemes in order to be economical at a lower TER.

Some fund houses revised their TER structure recently. The pace of consolidation of existing schemes is seen as one of the measures to shield schemes from steeper cuts in the TER.

Salary disclosures by top industry executives, according to a Sebi mandate, may have further necessitated cuts in the TER. Many feel pay packages of fund managers do not gel with the poor penetration of mutual funds in India.

Sources said there was no agreement on the issue between the Association of Mutual Funds in India and Sebi.