Mutual fund game changer! 5 SEBI proposals set to revolutionise your investments

SEBI's recent proposals aim to improve the mutual fund industry by reducing expense ratios, linking fees to performance, and enhancing transparency for investors.

• SEBI has proposed a revision of the total expense ratio (TER) for mutual funds with a cap and category-wise structure.

• Expenses like brokerage charges and transaction costs will be included within the scope of TER.

• SEBI suggests using the investor education fund for specific expenses and B30 commission instead of charging investors.

• The management fee will be dynamic based on the fund's performance, and distributor commissions will be regulated to discourage switching.

As many as 71 equity mutual fund schemes slid down during 2022 to deliver negative returns. By December 2022, 17 of these schemes had 10% or more year-to-date negative returns. Perhaps it would seem unfair to the scheme investors that the AMC continues to charge money when the fund performance is poorer than many other investments. The latest SEBI proposal intends to address it.

SEBI released a consultation paper recently that aims to make drastic amendments to the rules related to the mutual fund expense ratio, as well as linking fees to scheme performance, putting restrictions on distributors and a few other aspects.

Also Read: Learn why SEBI is unhappy with mutual funds

The Recent SEBI Proposals

1. SEBI Cuts Expense Ratio

SEBI's revolutionary proposal aims to revamp the calculation of the total expense ratio (TER) for fund houses. With a cap on TER, it suggests a correlation between TER reduction and scheme corpus growth. Additionally, SEBI introduces category-wise expense ratios: a fixed structure for equity schemes and a separate structure for debt schemes, serving as benchmarks for hybrid schemes.

2. TER Components

Presently, fund houses can charge various expenses over and above the TER. SEBI proposes to include these expenses, like brokerage charges and transaction costs, within the scope of TER.

Also Read: SEBI’s new TER rule and its benefits for you

3. Using investor education fund

SEBI's proposal aims to enhance the utilisation of the investor education fund, where mutual funds contribute 1% of their net assets annually. It suggests that fund houses should utilise the fund for specific expenses and B30 commission, alleviating the burden on investors.

4. Performance-linked TER

Presently, fund houses deduct a management fee on fund redemption, irrespective of the fund’s performance. With SEBI’s proposal, the management fee will be dynamic based on the fund performance. 

5. Distributor Commission

It has been observed that money from regular plans is often channelised into New Fund Offerings (NFO). To discourage distributors from switching money from one plan to another, SEBI proposes that distributors would earn lower of the two scheme commissions.

Parting thoughts

In conclusion, SEBI's recent proposals aim to address the concerns raised by the underperforming equity mutual fund schemes. The proposed amendments to the expense ratio calculation, utilisation of the investor education fund, and performance-linked TER will bring transparency, fairness, and cost savings to investors. These measures, along with the regulation on distributor commissions, are set to bring significant changes to the mutual fund industry, benefiting investors and ensuring a more accountable and competitive market.

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