A customer counts Indian one-hundred rupee banknotes (Photographer: Dhiraj Singh/Bloomberg)  

SEBI Makes Investing In Mutual Funds Less Pricey, Caps Total Expenses

In a major overhaul of the fee structure that mutual funds charge from investors, the Securities and Exchange Board of India issued new norms to cap total expenses for investment in such funds at 2.25 percent.

Rationalising the total expense ratio, the fee that mutual funds collect from investors every year to manage their money, SEBI said the new fee structure would come into force from April 1, 2019.

The move comes after the board of the market regulator cleared a proposal in this regard in September.

The regulator has capped the maximum TER for closed-ended equity schemes at 1.25 percent, and other than equity schemes at 1 percent. TER is a percentage of a scheme's corpus that a MF house charges towards expenses, including administrative and management.

The maximum TER for open-ended equity schemes will be 2.25 percent, and 2 percent for other open-ended schemes, the regulator said in a notification dated Dec. 13.

The TER was introduced in 1996 and since then, it has not been changed. Over a period of time, there have been varying practices in the industry with respect to charging of payments and commissions.

With regard to open-ended equity schemes, SEBI said that the highest expense ratio allowed to be charged for the first Rs 500 crore of assets will be 2.25 percent. As AUM increase, the expense ratio will have to come down.

Also read: SEBI Wants Tighter Risk Management For Liquid, Money Market Schemes

For the next Rs 250 crore, it will be 2 percent and for further Rs 1,250 crore, it will be 1.75 percent. For the next Rs 3,000 crore, the fee will be 1.6 percent, while for the next Rs 5,000 crore of the daily net assets, the charge will be 1.5 percent.

In the case of equity mutual funds with the daily net assets of Rs 40,000 crore, SEBI said that total expense ratio will be a decline of 0.05 percent for every increase of Rs 5,000 crore of daily net assets.

According to the regulator, equity schemes will have to invest a minimum of 65 percent of its net assets in equity and equity-related instruments. The regulator has made amendments to the SEBI’s mutual fund regulations. The 42-member strong mutual fund industry manages assets of Rs 24 lakh crore, as of November-end this year.