On Tuesday, the Securities and Exchange Board of India (Sebi) has cut the total expense ratio or TER charged by mutual funds. TER is the total costs associated with managing and operating a mutual fund. The total cost of the fund is divided by the fund’s total assets to calculate the TER. The mutual fund regulator also outlawed banned upfront commissions paid to the fund distributors.
“This is a welcome step by Sebi. Investors are going to get the benefit of a more transparent and cost-effective system. The lower expense ratio will impact your returns but it will not be an overnight turn around. Over a long period of time, a higher expense ratio could eat into your returns massively,” says Santosh Joseph, founder, Germinate Wealth Solutions.
TER is a measure of total cost of managing mutual funds that investors pay. It includes fund management fees, agent commissions, registrar fees, selling and promoting expenses. The regulator has capped the TER for fund houses with equity assets of up to Rs 500 billion at 1.05 per cent, against as much as 1.75 per cent earlier. Sebi also capped the fees for exchange-traded funds (ETFs) at 1 per cent. TER now cannot exceed 1.25 per cent for equity-oriented schemes, and 1 per cent for schemes other than the equity-oriented ones.
Sebi has barred mutual funds from paying distributors upfront commission for selling the products. The industry would instead move to a trail-fee model, which will benefit distributors if their clients stay invested for the long-term. “This move will reward long-term investors. Mis-sellings are expected to come down as the push will be for long-term investments. I think after mutual fund re-categorisation, this move makes mutual funds cost-effective and very transparent,” says Pankaj Gera, a certified financial planner.
Some other mutual fund advisors believe that this move might also diminish the large cost gap between direct and regular plans. “Many investors who do not understand their investments try to go direct to save on the expense ratios. Now that the gap is very less, people who need regular plans might opt for them and stay invested for a longer term.”