Since expense ratios are taken directly out of a scheme’s Net Asset Value (NAV), even a small cut in fees can make a noticeable difference to long-term returns. Lower costs mean more of an investor’s money stays invested and continues to grow over time, which is precisely what Sebi wants to encourage.
In the consultation paper, Sebi states that the provision allowing AMCs to charge an additional 5 bps to mutual fund schemes was temporary. This expense charged to the scheme has been removed from the draft MF Regulations. This move will help lower costs for investors who stay invested long-term.
To provide investors with a clearer understanding of the fees they pay, Sebi has proposed a new approach to expense ratios. The document states, “It is proposed to exclude all statutory levies, i.e., STT, GST, CTT, and stamp duty, from the expense ratio limits… so that any changes in statutory levies in the future are passed on to investors.” Sebi also mentions that expense ratio limits will be revised downward to reflect this shift.
Brokerage costs for equity and derivative trades are also being reduced. As the paper states, “The brokerage charge has been revised from 12 bps to 2 bps for cash market transactions and 5 bps to 1 bps for derivative transactions to bring clarity and transparency.”
Sebi is also demanding clearer disclosure of all the costs inside a scheme. It stated, “‘Total Expense Ratio’… shall clearly include expense ratio… plus brokerage, exchange and regulatory fee and statutory levy,” and that “disclosure requirement of Total Expense Ratio with all relevant heads has also been mandated.” The regulator says this will help small investors understand precisely what they are being charged.
To enhance fairness, fund houses may establish a link between performance and fees. The report notes, “A provision enabling expense ratio to be charged based on performance of a scheme has been introduced and the same shall be voluntary for AMCs.”
Sebi also wants to ensure that no investor pays for a new fund before it launches. According to the draft, “All the expenditures pertaining to launch of new fund offer till the date of allotment… shall be borne by the AMC or Trustees or Sponsor.”
There are also stronger rules to stop conflicts of interest when AMCs offer services to other clients. The paper says the AMC must ensure “the unit providing such service shall operate as a distinct business unit separated through Chinese walls with all the key employees segregated.”
Sebi has also clarified what costs can be taken from a scheme when it closes. It notes, “expenses that are connected with the winding up of an MF scheme can be deducted… Investment and advisory fees and distribution commission shall not be considered as winding up costs.”
While these are just proposals, investors need not worry about them and can continue with their investments. However, they must track the expense ratios of several schemes before investing and also look for any regulatory changes in the future.