Sebi plan to prune MF costs: New expense slabs, no additional charges

Proposes to bring expenses like brokerage, transaction, and GST within the total expense ratio

The Securities Exchange Board of India (Sebi) has shared the blueprint of the Total Expense Ratio (TER) overhaul of mutual funds and it's set to bring down the expenses paid by investors. In a consultation paper released on Thursday, the regulator proposed a new TER structure where the cap on total expenses will be linked to the total assets of mutual funds in each asset class in place of the present model where the maximum expenses depend on the total assets being managed in a scheme.

Further, the regulator plans to bring expenses like transaction costs, brokerage, and goods and services tax (GST) within the TER.

"It is observed that spending of some schemes towards brokerage and transaction cost is more than even the maximum TER limits prescribed. This has resulted in investors paying more than double the permissible TER limits... It is proposed that brokerage and transaction expenses may be included within the TER limit and the transaction-wise limits," the consultation paper states.  

As a result, while the maximum TER limit is proposed to go up slightly for equity schemes, the overall expenses paid by investors will come down as there won't be any charges over and above the TER. The regulator has proposed the highest TER slab for equity schemes at 2.55 per cent compared to the present cap of 2.25 per cent. For debt, the maximum TER slab is proposed to be brought down to 1.2 per cent from 2 per cent.

According to the regulator, the total expenses paid by investors of new equity oriented schemes are presently 2.78 per cent on an average, much higher than the prescribed limit of 2.25 per cent due to additional charges. The consultation paper reveals that the new expense structure can bring down the expenses paid by investors by 4.55 per cent. In the financial year 2022, the MF industry charged a total of Rs 30,806 crore for the management of active schemes and going by the proposed model, these expenses amounted to Rs 29,404 crore.

While the regulator acknowledged the burden on MFs due to the inclusion of additional expenses, especially the transaction cost and brokerage, it said that the move is important to "bring  in  much  needed  transparency  in  the  costs  charged  to unitholders, and greater accountability in respect of the significant brokerage costs, with oversight from the AMC Board/Trustees".

It has proposed to allow asset management companies (AMCs)  to  obtain  limited  purpose  membership  with  stock  exchanges  for executing trades for their own mutual fund schemes. This set up is likely to bring down the transaction expenses for mutual funds.

The regulator has also proposed to open an avenue for MFs to charge higher fees if they are able to outperform. Sebi said that MFs may be allowed to charge  higher  management fees if the scheme performance is more than an indicative return (the benchmark returns adjusted for operating costs). In such a model, the base TER will be that of passive schemes and the total fee will go up based on the outperformance will be charged during redemption.

Further, the additional expenses paid to distributors for bringing investors from smaller towns is proposed to make a comeback, albeit in a different form. The plan is to now reward distributors only for bringing in new investors (based on PAN) rather than the previous structure where investments from all B-30 investors were eligible for additional commission in the first year. The regulator plans to extend this commission structure for women MF investors residing in top cities as well to enable financial inclusion of women in MF space.

"An additional incentive may be introduced for distributors for new investments/inflows from women investors(new PAN) at the industry level.  It shall have to be ensured by AMCs that the proposed incentive for women investors is extended only in those cases where B-30 incentive is not given," the regulator stated.

These additional commissions would be paid to distributors from their investor education budget to ensure that there is no additional burden on MF investors.