To bring more transparency, markets regulator, Securities and Exchange Board of India (Sebi), on Tuesday reviewed Total Expense Ratio (TER) of mutual fund schemes.
Sebi board said the assets under management (AUM) of mutual fund industry in India has grown manifold over the years, but the benefit of economies of scale has not been fully shared with the investors.
The markets regulator said the slab wise limits of TER introduced in 1996 under Sebi (Mutual Funds) Regulations, 1996 have not been changed since then and it has observed that over a period of time, there have been varying practices in the industry with respect to charging of expenses and payment of commissions.
In order to curb total expense ratio,
Sebi undertook an internal study and the observations was placed in a meeting of the Mutual Fund Advisory Committee (MFAC).
The MFAC in turn has made several recommendations on transparency in expenses, TER for various types of mutual fund schemes, investments through SIPs, limiting the additional incentives for B-30 cities based on inflows from retail investors, performance disclosure of mutual fund schemes, etc.
Accordingly, the board approved the following proposals:
Transparency in Expenses:
All commission and expenses, etc. shall necessarily be paid from the scheme only and not from the AMC/associate/sponsor/trustee, or any other route.
Further, the mutual fund industry must adopt the full trail model of commission in all schemes without payment of any upfront commission or upfronting of any trail commission.
A carve out has been provided for upfronting of trail commission in case of SIPs subject to fulfilment of certain conditions.
TER for open ended schemes shall be as follows:
AUM Slab (Rs Crore) TER For Equity Oriented Schemes TER For Other Schemes (Excluding Index, ETFs and FoFs) 0-500 2.25% 2% 500-750 2% 1.75% 750-2,000 1.75% 1.50% 2,000-5,000 1.60% 1.35% 5,000-10,000 1.50% 1.25% 10,000-50,000 TER reduction of 0.05% for every increase of Rs 5,000 crore in AUM TER reduction of 0.05% for every increase of Rs 5,000 crore in AUM Over 50,000 1.05% 0.80% TER for Close Ended and Interval Schemes:
TER for equity oriented schemes shall be a maximum of 1.25 percent and for other than equity oriented schemes shall be a maximum of 1 percent.
TER for Index schemes, Exchange Traded Funds (ETFs) and Fund of Funds:
a) Index Funds and ETFs: The TER shall be a maximum of 1.00 percent.
b) Fund of Funds (FoFs): The TER of FoF scheme, shall be a maximum of twice the TER of the underlying funds.
i) FoFs investing primarily in Liquid, Index and ETF schemes: Total TER (including the TER of underlying schemes) shall be maximum of 1.00 percent.
ii) FoFs investing primarily in active underlying schemes: Total TER (including the TER of the underlying schemes), shall be maximum of 2.25 percent for equity oriented schemes, and maximum of 2 percent for other than equity oriented schemes.
Additional expenses of 30 bps for penetration in B-30 cities:
The additional expense permitted for penetration in B-30 cities, shall be based on inflows from retail investors. The definition of ‘retail investors’ shall be determined in consultation with the industry. Pending such clarification, the additional incentive shall be permitted for inflows from individual investors only and not on inflows from corporates and institutions. Further, the B-30 incentive shall be paid as trail only.
Adequate disclosure of all schemes’ returns (category wise) vis-à-vis its benchmark (total returns) shall be made available on the website of AMFI.
Upon implementation of the above decisions, the Trustees and AMC Boards shall monitor the implementation by the respective AMCs and shall report to Sebi periodically.
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