Hyderabad: The Securities and Exchange Board of India (SEBI) has rationalised the total expense ratio (TER) for Mutual Fund schemes by bringing in several slabs while keeping a maximum permissible limit at 2.25% for equity schemes and 2% for other schemes of the total assets under management.
This, in turn, means marginally higher returns for investors as the charges the investors pay to the fund houses reduce by 10 to 60 basis points, according to Adhil Shetty, Chief Executive Officer, BankBazaar.
The TER, the costs associated with managing and operating a mutual fund scheme, comprise management fees, distributors’ commission and other charges. This is charged to investors at the time of mutual fund redemption as per the NAV of that fund.
For instance, if the mutual fund investment value is Rs 1,000 and current TER is 2.75 per cent, the investors pay Rs 27.5 as fees during redemption. With 50 basis points reduction now, the fees will be reduced to Rs 22.5, saving Rs 5, which can go into the investments.
Since, quantum of investment has gone up, it means an investor will get more mutual fund units. This will be advantageous in the long run. For instance, the Sensex has grown at an average of around 12 per cent per annum in the last 20 years, he said adding that there will also be a compounding impact of the benefits.
Since, TER is on the declining trend, it will impact the commission pay-out structure to mutual fund distributors. More fund houses will adopt trail-based commission payment to distributors (where an advisor gets a commission every year as long as the investors continue in the scheme) while abolishing upfront commission on investments.
As a result, the intermediaries will attempt to have a continuous relationship with investors to have continuous flow of trail commission. Investors stand to get better service and advice from distributors, said Shetty.