Asset Management Companies (AMCs) are permitted to charge operating expenses for managing or running a mutual fund business. These expenses include sales and marketing expenses, administrative expenses, transaction costs, investment management fees, registrar fees, and custodian fees amongst others, also known as ‘Expense Ratio’. In short, the Total Expense Ratio (TER), or the fees charged by AMCs to manage a scheme, is expressed as a percentage of the assets managed by the fund manager.

On September 18, 2018, Securities and Exchange Board of India (Sebi) in its board meeting reduced the TER charged by the mutual funds. Presently, the TER for actively managed equity-oriented schemes as per regulations is 2.5 per cent for the first Rs 100 crore of average weekly net assets; 2.25 per cent for the next Rs 300 crore, 2 per cent for the subsequent Rs 300 crore, and 1.75 per cent for the balance Asset Under Management (AUM). When it comes to the debt schemes, the expense ratio allowed is 0.25 per cent, which is lower than what is allowed for equity funds.

However, AMCs are permitted to charge up to 30 basis points more in case of 30 per cent or more of new inflows coming from locations other than the top-15 cities. This new move is set to augment the penetration of the mutual funds in Tier-2 and Tier-3 cities.

Further as per the market regulator, in terms of expenses no pass back - either directly or indirectly - should be allowed by AMCs or distributors to the investors. That said, any reduction in TER directly benefits the end investor as the returns are always net of the total expenses charged.

The reduced TER also bodes well for the investors as it brings more transparency in terms of expenses. Also, this would reduce the mis-selling by distributors to earn higher commission as the mutual fund industry has adopted the full trail model of commission in all schemes without payment of any upfront commission.