SEBI’s New TER Proposals: Will Mutual Funds Become Cheaper?

Date : 29/05/2023
Read: 3 mins

A look at SEBI’s new TER rule and how it will impact the mutual fund expenses

SEBI has tabled a new consultation paper that looks to overhaul mutual fund TER
Compared to existing rules, the expense in funds may see more uniformity and transparency
With this proposal, most fund categories will see a reduction in expenses

The Securities and Exchange Board of India’s (SEBI) latest proposal on mutual fund expenses, if implemented, is likely to make 45% of equity funds cheaper.

The Securities and Exchange Board of India (SEBI) released a consultation paper on the review of the total expense ratio (TER) charged by asset management companies (AMCs) from unitholders of mutual funds. Carried out with the aim of facilitating greater transparency and cascading the benefits of economies of scale to investors, the paper was released on 18 May 2023.

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What is the TER Proposal?

Presently, SEBI has a graded TER cap in place for mutual fund schemes. Here, the TER cap grows smaller as the scheme size grows bigger. The schemes with the lowest size have a TER cap of 2.25%. The cap gets smaller with respect to increasing scheme sizes. This is applicable to debt, equity, and hybrid mutual funds.

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SEBI proposes the replacement of the existing scheme-wise TER with an asset-class-based TER. Accordingly, equity mutual funds will have a uniform expense ratio and as will debt funds. Hybrid mutual funds will have a proportional split base on the debt-equity weightage). The asset-level cap for equity schemes will start at 2.55% and progressively slide downwards as the scheme sizes increase.

Analysts have observed that the proposed cap of 2.55%, although higher than the existing cap of 2.25%, will impact a few schemes and benefit the most. Notably, the existing cap encouraged AMCs to launch small schemes and tap the higher TER cap. The existing rules allow four additional expenses - namely brokerage and transaction costs, beyond the top-30 city distribution commission, GST and exit load. However, the consultation paper proposes that the new cap will include these additional costs within the TER. In the equity sector, thematic/sectoral and dividend yield schemes tend to have a lower fund size and may have the highest cap. Many small, mid and large-cap schemes will get cheaper, as would ELSS, flexi-cap and multi-cap schemes.

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The new SEBI proposal, if implemented, will dent the inflow of the AMCs in terms of distributor commission and earnings. However, for retail investors, it can lead to cheaper fund schemes, financial awareness and transparency.