Sebi lowers expenses for mutual fund investors, bars upfront commission
19 September 2018
Market regulator Securities and Exchange Board of India (Sebi) has decided to lower expenses paid by investors of equity mutual fund schemes by capping the total expense ratio as a percentage of assets of a scheme.
The total expense ratio will be brought down considering economies of scale, Ajay Tyagi, Sebi chairman said at a press conference after a meeting of the regulator’s board.
The revision in investor expenses could dent mutual fund industry revenues by Rs1,300-1,500 crore, according to Madhabi Puri Buch, whole-time member at Sebi.
With a record of Rs25,00,000 crore worth of assets under management , the mutual fund industry has an annual revenue of about Rs13,000 crore.
While lowering expenses will not lead to any big fall in revenues of mutual funds, it will help pass on the benefits of scale and efficiencies to investors. The impact, he said, will vary with each asset management company.
Indian mutual funds are the most expensive in the world, with average equity expense ratio of 2.22 per cent, says Morningstar in its October 2017 report. But the Foundation of Independent Financial Advisors, in a separate report, countered that at 1.88 per cent, the ratio is the lowest among developing nations.
The total expense ratio for closed-ended equity oriented schemes shall be a maximum of 1.25 per cent, and for other closed-ended schemes will be a maximum 1 per cent, Sebi said.
For index funds and exchange-traded funds, it will be up to 1 per cent while in Fund of Funds, the TER will be a maximum of twice of the TER of underlying funds.
For Fund of Funds investing in liquid, index and ETF schemes, the maximum total TER will be 1 per cent.
For Fund of Funds investing in active underlying schemes, the maximum total TER will be 2.25 percent for equity oriented schemes and 2 percent for other schemes.
In a bid to prevent mis-selling, Sebi also barred mutual funds from paying fees to distributors from their books. Commissions will come from schemes and not the asset management companies, Tyagi said.
The regulator also barred any upfront commissions and said the industry should follow the full-trail model — based on investments by clients. Upfront commissions are allowed in systematic investment plans subject to certain conditions.
Lower expenses and commissions, however, triggered concerns that advisers could push financial products with higher costs and fees.