Unveiling the Mutual Funds that Will Save You Money: Sebi's TER Proposals Revealed

Wondering which mutual funds may experience price reductions post Sebi's TER proposals? Find out now!

 Sebi's TER Proposals
  • SEBI proposes new TER structure.
  • Current TER structure flawed, encourages small schemes.
  • New proposals could lower TER for many schemes.
  • Thematic and sectoral funds are likely to benefit most.

Get ready to uncover the potential savings in the world of mutual funds! Sebi's recent Total Expense Ratio (TER) consultation paper has sent ripples through the industry, and the findings are both intriguing and promising. According to a research note from Fisdom, a leading mutual fund distribution platform, approximately 41% of hybrid schemes, 31% of debt schemes, and 45% of equity schemes have the potential to become more affordable if Sebi's proposals are implemented as they stand. In this article, we delve into the analysis to reveal which mutual funds could get cheaper post Sebi's TER proposals, empowering you to make informed investment decisions and maximise your returns.

What are the highlights of SEBI’s TER proposals?

Currently, each mutual fund scheme has its own TER (Total Expense Ratio). SEBI is proposing to replace this with a single TER for each asset class, such as equity, debt, or hybrid. This means that all equity funds will have the same TER, regardless of the fund house or the scheme. The same will be true for debt and hybrid funds. SEBI is also proposing to bring certain costs that are currently outside of the TER cap into the TER. These costs include additional TER for flows from beyond 30 cities, and additional TER in lieu of exit load and brokerage.

What is the current TER structure and what are its flaws?

Currently, according to Sebi rules, equity funds have a decreasing TER cap as the scheme's size increases. Initially, the cap is set at 2.25%, and as the scheme grows larger, the cap gradually decreases. This principle also applies to hybrid and debt funds.

The current TER structure has encouraged mutual funds to launch many small schemes and charge high TER on them instead of having a few schemes with lower TER. The new proposals suggest replacing the TER cap for each scheme with a cap for each asset type of mutual fund. For equity mutual funds, the cap will start at 2.55% and decrease as the fund house's total assets under management (AUM) in that type of mutual fund decrease over time.

Also ReadShould you invest in single or multiple fund schemes?

Which funds are likely to benefit the most from proposed revisions?

While the initial TER cap of 2.55% may seem higher, it actually includes additional expenses like brokerage and TER for investments beyond 30 cities. As a result, many schemes could see a decrease in their actual TER. Fisdom's analysis suggests that thematic and sectoral funds, which are typically smaller and have higher TERs, will experience the greatest impact of these changes. Given below is the analysis from Fisdom Research.

analysis from Fisdom Research

Source: https://www.livemint.com

Also ReadDifferent types of funds available under mutual funds

As per calculations, about 79% of mutual fund schemes have a TER higher than the proposed TER cap by SEBI. Among hybrid funds, Balanced Advantage Funds (BAFs) and Aggressive Hybrid Funds will be most affected. Among debt funds, the credit risk category will see the biggest reduction in TER.

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