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.
What does this mean? Simply, the charges that investors pay to mutual funds houses to manage their money will now be reduced by around 10 basis points (bps) to as high as 60 basis points in some cases. This, in turn, means marginally higher returns for investors.
The TER is the total costs associated with managing and operating a mutual fund scheme. Such costs primarily comprise management fees, distributors’ commission and other operational charges. This expense is charged to investors at the time of mutual fund redemption as per the NAV of that fund.
TER for open ended schemes shall be as follows:
|AUM Slab |
|TER For Equity Oriented Schemes||TER For Other Schemes (Excluding Index, ETFs and Fund Of Funds)|
|5,000 – 10,000||1.50%||1.25%|
|10,000 – 50,000||TER reduction of 0.05% for every increase of 5,000 crore AUM or part thereof||TER reduction of 0.05% for every increase of 5,000 crore AUM or part thereof|
|Existing TER is mentioned under Regulations 52 (6) of SEBI (Mutual Funds) regulations, 1996|
Source: Sebi Circular
Let’s take a deeper look at what this means for investors.
Investment Costs Go Down
For instance, if you are investing in a scheme which has currently a TER of 2.75%, the new rules bring it to 2.25%. This straightaway means your fees is reduced by 50 basis points in absolute term which means a decline of a little over 18% in your costs to invest in mutual funds. Let’s assume if your mutual fund investment value is Rs. 1,000 and your TER is 2.75%, you are paying Rs. 27.5 as fees during redemption. With 50 basis points reduction to 2.25%, your fees will be reduced to Rs. 22.5, saving you Rs. 5. The larger your investments, the higher your savings. In short, investing in mutual funds becomes cheaper now as you pay lesser charges.
Investment Amount Increases
Taking the hypothetical example above, with a decline in the expense ratio, you save Rs. 5 per Rs. 1000 invested. These savings mean a marginally larger part of your money is going to fetch you returns. Earlier, with Rs. 27.5 as fees out of your investment of Rs. 1,000, only Rs. 972.5 were being invested. Now, with reduced charges at Rs. 22.5, your investment amount rises to Rs. 977.5.
You Acquire More Units
Since, the quantum of investment has gone up; it essentially means you are acquiring more number of mutual fund units. This will prove advantageous in the long run for investors as they accumulate a higher number of units whose values will presumably appreciate with time. What can be the rate of appreciation? If you look at the stock markets alone, the Sensex has grown at an average of around 11-12% per annum in the last 20 years.
Incremental Compounding Impact
Above mentioned benefits were instant benefits to investors. However, the significant benefit will be in the long-term investment journey when such incremental investments of additional generated surplus (after slashing TER) would show its compounding impact. Not only will your investment amount go up steadily, but the value of your investments, due to the incremental impact, would be much higher than it would have been otherwise. In short, investors get benefit of instant impact as well as significant future impact on their investments.
You May Get Better Service By Your Distributor
Since, TER is on the declining trend it will impact the commission payout structure to mutual fund distributors. More and more fund houses will adopt trail-based commission payment to distributors while abolishing upfront commission on investments (with few exceptions like SIP); intermediaries would attempt to have a long-lasting relationship with investors in order to have continuous flow of trail commission. As a consequence, as an investor you stand the chance of getting better service and advice by your distributors or other intermediaries.
The writer is CEO, BankBazaar.