Do you know India ranks third lowest in terms of cost structure in compare of other geographies? Yes, it is true! Whether you believe it or not but the cost of investing in mutual funds in India is quite expensive. It generates a debate among investors, distributors, and fund houses. The total expense ratio (TER) for mutual funds is quite high. Total expense ratio (TER) is the total cost of operating and managing a mutual fund scheme. Basically, the entire cost of buying a mutual fund scheme is stated in a single form known as total expense ratio (TER). It computed as a percentage of the total assets of the mutual fund scheme including administration, management, distribution, and other charges.
Many investors were suffering from high TER in all these years. These fund costs are very critical and can eat a big part of your returns over longer periods of time. Despite the rapid growth in assets over the past years, the investors are not getting the fair deal. Even a 25 bps variation in costs can highly affect the corpus it generates. As a result, investors were opting for cheap direct plans.
The Indian market regulator Securities and Exchange Board of India (SEBI) looked over the current total expense ratio of mutual funds and come up with something new.
How Mutual Fund Investors Gain From New SEBI Norms?
Last week, the capital markets regulator SEBI took a decision to justify the total expense ratio on mutual funds which will help various investors to save on annual charges and maximize their returns in investing in a particular mutual fund scheme.
Where there was a 25 bps variation on cost affecting the investors now an equity investor may save up to 80-90 basis points in annual charges on their investment corpus. On the other hand, the distributors are clueless about their salary from mutual fund advisory.
The mutual funds who have been allowed to charge high TER (2.25& max.) for schemes with assets under management (AUM) of up to Rs. 500 crore, they will have to reduce the TER in line with the growth in AUM of the scheme. It has been argued that the benefits of growth in revenues from the rise in AUM have not been properly passed on to the investors. As a result, the expenditure of managing the fund rose marginally.
Besides, the mutual funds are recognized for their transparency and high-returns over long periods of time. Thus, in order to share the benefits of scale with the investors and bringing more transparency in terms of expenses, the SEBI Board announced the TER Rationalization of the new structure for all open-ended equity schemes.
New Structure for All Open-ended Equity Schemes
|Schemes with AAUM||TER (in percentage)|
|Up to Rs 500 crore||2.25%|
|Rs 5,000 to Rs 10,000 crore||1.5%|
|Rs 10,000 to Rs 50,000 crore||0.5% (for every Rs 5,000 increase in AUM)|
|Over Rs 50,000 crore||1.05%|
With the new structure, the investors can save up to 80-90 basis points in charges, every year, on their AUM. For example, the SBI Bluechip Fund whose AUM is over Rs 20,000 crore has a TER of 2.35%. But, under the new rules, the TER will come down to 1.4% + the additional TER on account of inflows from B-15 cities. It means, if an investor who invested 1 lakh in the scheme, at say 10% for 20 years with a TER of 2.35%, would have grown to a corpus of Rs 4.18 lakh; the same investment under the new structure with TER of 1.5% would grow into a corpus of Rs 4.99 lakh.
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