Indian market regulator SEBI has proposed a major measure to reduce mutual fund expenses and make fee structures more transparent. A consultation paper released on Tuesday stated that fund houses will now be required to disclose upfront the full details of the charges they charge investors.
Proposal to reduce TER
SEBI has recommended a reduction in the total expense ratio (TER). This reduction is proposed to be up to 0.15% for open-ended mutual funds and up to 0.25% for closed-end schemes. The regulator clarified that brokerage, taxes, and other transaction costs will not be included in these fees but will be disclosed separately.
This move is different from SEBI’s 2023 framework, which sought to include all these charges in the TER. At that time, the proposal was controversial due to opposition from asset managers, who currently manage approximately ₹75.61 trillion (approximately $860.23 billion) of investor assets.
Brokerage fees also cut
SEBI has also suggested stricter regulations on brokerage fees. Brokerage fees in the cash market could be reduced from 12 basis points to 2 basis points. For derivative transactions, this fee is proposed to be reduced from 5 basis points to 1 basis point.
Performance-linked fee clause
SEBI stated that asset managers may adopt a performance-linked differential fee structure, meaning fees can be determined based on fund performance. Furthermore, fund houses must ensure that any non-mutual fund business they engage in is run as a separate entity and that the responsibilities of key employees are completely separate.
Investors benefit from reduced fees
Reducing mutual fund fees will directly benefit investors. Now, let’s assume an investor has invested ₹10 lakh in a mutual fund. The current total expense ratio (TER) is approximately 1.75%. If SEBI’s proposal is implemented and it is reduced by 0.15% to 0.25%, the annual savings would be as follows:
- At 0.15% reduction: ₹1500 per ₹10 lakh
- At 0.25% reduction: ₹2500 per ₹10 lakh
This amount may seem small, but compounding over the long term makes a significant difference. Over a 15-20 year investment, this savings can yield an additional benefit of ₹50,000 to ₹1 lakh, simply due to reduced expenses.
This will also have some indirect benefits. Brokerage, taxes, and transaction costs will have to be shown separately. This will clearly show the investor the “true total expense.” This means that the scope for hidden charges will be virtually eliminated. And performance-linked fees mean that the fund manager’s earnings will be directly linked to the fund’s performance. This means that the AMC will earn more only if the investor earns.
Analysts’ opinion
According to market experts, these new proposals from SEBI could put pressure on Asset Management Companies (AMC) stocks in the short term. This is because the reduction in mutual fund fees will impact their revenue. Companies whose business models rely heavily on these fees may see their margins shrink temporarily.
But in the long term, this decision will prove very beneficial for investors. Reducing fees and providing complete expense details will make the investment process more transparent. Investors will clearly see how much of their earnings is going to the AMC and how much is actually growing their funds.
Additionally, the performance-linked fee model will incentivize fund managers for better performance. This means that AMCs will receive higher fees only if the fund generates good returns. This will strengthen both governance and investor confidence across the sector.
