The Securities and Exchange Board of India's (Sebi's) circular on bringing transparency and reviewing the total expense ratio (TER) structure could make the cost of investing in equity schemes through direct plans cheaper.
Experts said expenses in direct plans will get adjusted as fund houses start following the regulatory diktat that all scheme-related expenses should be booked in individual schemes.
Direct plans are those where an investor bypasses the distributor by transacting directly with the fund house. The initial set of cuts being announced in TER of direct plans in equity schemes are in the range of 35-85 basis points (bps).
“The expenses are now being completely shifted to the schemes and this is getting reflected in the new TER structure. We have already communicated with the distributors as Sebi’s circular stated that the revised TER structure comes into force with immediate effect,” said Swarup Mohanty, chief executive officer of Mirae AMC.
Among other fund houses, Reliance MF has also communicated to distributors that the prevailing brokerage structures stand discontinued and new structures will be communicated shortly. Sundaram MF also communicated that the prevailing structures will be modified with immediate effect and new structures will be conveyed shortly.
As reported earlier, Sebi was probing whether some fund houses were overcharging investors opting for direct plans by not entirely waiving the expenses related to distributors. The narrow difference between TER of direct and regular plans in some cases had prompted Sebi to look into the matter. The early phase of cuts in direct plan TER already suggests that the direct-regular plan differential in equity schemes could widen by another 50 bps.
The reason equity schemes stand to gain most is because TER of these plans was already closer to their regulatory ceilings. Experts said that on the debt side, MFs had kept the TER much below the regulatory limits. They added that the expenses were also lower for debt schemes as MFs didn’t need to spend much on distributor commissions.
Sebi, in its board meeting agenda note on review of total expense ratio (TER) in the MF industry, highlighted that there was a tendency to charge upto the maximum permissible base TER in case of equity schemes where there were largely retail investors. In contrast, expenses charged in debt schemes were far below the regulatory limits. The investors in debt schemes were largely institutions or corporates.
Besides bringing in more transparency to the TER structure, Sebi also formalised new TER slabs in its circular. While earlier, regulations allowed 2.5 per cent TER for the first Rs 1 billion of an equity scheme’s net assets, the new slab allows equity schemes with assets of up to Rs 5 billion to charge 2.25 per cent TER.
The circular also formalised scrapping the upfront commission, except in the case of systematic investment plans (SIPs). Distributors said that scrapping upfront commission can marginalise smaller distributors over time. “Lack of upfront commissions could severely disincentivise smaller independent financial advisors who are genuinely trying to reach out to new investors and helping them start their initial investments in mutual funds,” said Dhruv Mehta, chairman of the Foundation of Independent Financial Advisors.
Fund houses are trying to keep distributors’ interests in mind. While cutting TER in direct plans of its equity schemes, Edelweiss MF has marginally increased TER in regular plans of its equity schemes. “We have aligned our expense ratios in line with Sebi's regulations. Our endeavour is to always treat our customers and distribution partners fairly,” said Radhika Gupta, chief executive officer of Edelweiss MF.