Sebi plans to issue a revised discussion paper on mutual fund fee structures, addressing concerns of profitability raised by the mutual fund industry
The Securities and Exchange Board of India (Sebi) could soften its previous proposal of imposing a standard investor fee on mutual funds. The market regulator is considering a revised discussion paper, which is likely to be released in the coming weeks, with two options.
In its initial proposal released on May 18, 2023, Sebi allowed mutual fund houses to charge a maximum fee (Total Expense Ratio) of 2.55 per cent of the assets under management (AUM), covering all expenses, including brokerage costs.
TER is a percentage that represents the expenses charged by a mutual fund house to investors, covering administrative and management costs. However, this proposal faced opposition from the industry, which argued that it would significantly reduce the profitability of asset management companies (AMCs) by 20-80 per cent.
Two Options To Be Floated By Sebi
To address these concerns, Sebi is now exploring two options. One option is to allow mutual funds to charge higher fees, covering all expenses, including brokerage and taxes paid by the fund houses.
The other option involves excluding expenses like brokerage and taxes from TER. However, the investor fees that can be charged by the AMC will be lower.
At present, mutual funds can levy four additional expenses in addition to TER. As part of this revised framework, arbitrage funds, which engage in frequent buying and selling of securities and thus face higher tax burdens, will have the flexibility to choose the second option.
A final decision will be made based on the feedback received on the discussion paper that is to be released. However, the mutual fund industry expects it to be set at a level that has a “marginal impact” on profitability, Reuters quoted a source as saying.
Current TER Framework That Drew Criticism
Sebi’s previous discussion paper, released on May 18, 2023 proposed increasing the maximum TER for mutual funds, but also aimed to include all additional expenses under TER. The regulator had then expressed concerns about AMCs charging brokerage and transaction charges to mutual fund schemes as additional expenses.
A major change considered is to have TER slabs at the AMC level rather than the scheme level.
Sebi has said this would prevent arbitrage between different schemes as well as provide growth opportunities for AMCs of all sizes. By having a uniform TER across mutual fund schemes, it would enhance transparency in the costs charged to unitholders, it said.
Under the new framework, Sebi has suggested a maximum TER of 2.55 per cent that can be charged for an equity scheme at the AMC level. This limit applies to AMCs falling within the AUM slab of up to Rs 2,500 crore.
To accommodate the Goods and Services Tax (GST) expenses incurred on investments and advisory fees, Sebi further said that it has slightly increased the maximum permissible TER rate from 2.25 per cent to 2.55 per cent.