SEBI’s revised consultation paper on expense ratio of MFs expected next week

Capital market regulator SEBI has decided on the revised total expense ratio for mutual funds and a revised consultation paper is expected next week. The new TER will be more investor-friendly and will incorporate most of the recommendations made by the mutual fund industry, sources said.

In May, SEBI had released a consultation on TER which included all the expenses charged by mutual funds including statutory levies including STT and GST and shifted the cap on TER based on AUM of the mutual fund from the current scheme-level limits.

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SEBI felt that the mutual funds have not passed on the benefit of scale by charging lower TER to investors. This was vehemently opposed by the fund houses and distributors who felt the all-encompassing TER will result in lower commission for them.

In their response to the consultation paper the industry had made a data-backed representation highlighting 20 per cent decline in TER between 2018-22 due to economies of scale by the industry and impact on profitability and growth of the industry following regulatory changes between 2009-13 and 2018-22. Currently TER ratio for listed AMCs for equity schemes is between 1.5-1.6 per cent.

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Following this, SEBI Chairperson Madhabi Puri Buch after the June 28 Board meeting said the regulator is satisfied that economies of scale has been achieved and a second consultation paper will be issued by incorporating suggestions made by the industry.

Sebi had proposed to cut the TER progressively as the overall asset under management growth. This move was proposed to help the smaller AMCs charge higher TER. However, a MF senior executive said, the move was counter-productive and will only benefit big AMC by charging lower TER.

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