Mutual funds total expense ratio: SEBI proposes uniformity across schemes

Investing in mutual funds may soon get simpler and cheaper with SEBI's new proposal.

In a consultation paper, the capital markets regulator has proposed a uniform total expense ratio (TER) across mutual funds schemes. This move is aimed to bring in transparency in the costs charged to the unitholders.

Total expense ratio is a percentage of the corpus that an asset management company charges for expenses including administrative and management.

Currently, SEBI allows the mutual fund companies to charge the unitholders 4 additional types of expenses in addition to the specified TER limits. This includes transaction costs, brokerage, additional TER for distributor commission for inflows from B-30 (cities that are beyond top 30) cities, GST and exit load expense.

In the consultation paper SEBI said, "TER reflects the maximum expense ratio that an investor may have to pay and hence it should be inclusive of all the expenses permitted to be charged to an investor and the investor should not be charged any amount over and above the prescribed TER limits".

Hence, SEBI has proposed that all expenses should be brought within the TER limit. The limits on the TER will be kept at the AMC level but will include all the expenses including GST on management fees, brokerage and transaction costs, B-30 incentives etc.

The market regulator has also proposed to remove the provision that enables AMC to charge an additional expense of 5 basis points for schemes having provision of exit load.

SEBI has also suggested that the additional commission to distributors may continue for inflows from B-30 cities. But only for inflows from new investors and capped at Rs 2000. The regulator wants the AMCs to design their distribution commission policy in a way that would promote more inflows from B-30 cities.

In order to protect small AMCs, SEBI has proposed that all the expenses of regular and direct plans will be uniform except the distribution commission. SEBI has sought comments and suggestions on the proposal till June 1.