It’s been several weeks since the mutual fund industry last heard from the market regulator on the tweaks to its expense structure. This has led many to speculate that the new proposals that were to be “co-created with the industry” may have been junked, deferred indefinitely or put in cold storage.

The proposals on total expense ratio (TER) – the total costs or expenses in running a scheme – had originated from SEBI early last year and was first put before the Mutual Fund Advisory Committee (MFAC) for discussion.

“SEBI did a presentation after which the matter was discussed at length. And because we were not given an advance notice about the issue, the MFAC members were given two weeks to give their views in writing,” said an MFAC member.

Consultation paper floated

SEBI then floated a paper for public consultation, which was modified by the regulator after public feedback. The modified proposals were then taken to the Board, which asked the regulator to float a new paper for public consultation since the original ones were modified significantly. Post that, the regulator revised its proposals, some of which were discussed again at MFAC.

This was sometime in July. There’s been a deafening silence since then.

“There has been no discussion since then, absolutely no discussion... at the SEBI, AMFI or MFAC level. Not a whimper,” said a senior MF official.

An email sent to SEBI and the Association of Mutual Funds in India did not immediately get a response.

Sliding structure

In SEBI’s sliding scale structure for TER, fees reduce proportionately as scheme assets grow larger.

The intent of altering TER norms last year was improving transparency, passing on the benefit of scale to investors and improving linkage of TER charges with fund performance.

SEBI was concerned that monies were being shifted from existing to new schemes (which charged higher expenses) and that brokerage and other expenses were being charged over and above the expense limits. As a result, the actual TER was higher than reported numbers by about 40 basis points on equity schemes and 3-6 bps on others.

“The data showed that the industry was passing all the scale benefits. So, there was a rethink on whether a change in norms would bring about any significant benefits,” said the first official quoted above. “I don’t know whether they are trying to come out with something radically different from the first set of proposals. But with ease of doing business taking centrestage, this definitely seems to be low on the regulator’s priority list.”

A report by Jefferies last year had observed that the SEBI’s consultation paper on new fee caps could impact industry profits by 13 per cent, although a part of it would most likely be passed on to distributors, brokers and other partners.

The expense ratio eats into returns; so higher the expenses lower the returns. Investors, however, typically start thinking about expense ratios only when fund performances take a hit.

“There is certainly some room for rationalisation of TERs,” said Vicky Mehta, an independent analyst who tracks mutual funds. “For an average investor it is difficult to grasp how an expense ratio is calculated and what causes it to change. The structure can be simplified further and more clearly communicated to investors.”

The Morningstar Global Investor Experience Study 2022, which grades the experiences of mutual fund investors across 26 markets, showed India’s Fees and Expenses grade remained consistent at Average, indicating some room for improvement.

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Published on January 18, 2024