SEBI has recently proposed key changes on the expense ratio charged by mutual funds.
In addition to this, Market regulator Securities and Exchange Board of India has proposed removal of statutory levies like STT, GST, etc. to be excluded from Total Expense Ratio (TER) limits.
SEBI Proposes Regulatory Changes To Mutual Funds
“With a view to facilitate greater clarity and transparency, it is proposed to exclude all statutory levy i.e. STT, GST, CTT, Stamp duty from the expense ratio limits along with the present permissible expenses for brokerage, exchange and regulatory fees,” SEBI stated in a paper.
They have proposed a new provision for optional performance based differential TER.
“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. A detailed framework in this regard shall be finalised separately in consultation with stakeholders,” as per the SEBI paper.
Further adding that present GST on management fees is permitted over and above the TER limit.
Contrary to this, all other statutory charges are part of the overall TER limit specified for mutual fund schemes.
Now they have proposed that the expense ratio limits should be exclusive of statutory levy, so that any change in statutory levy in future is passed on to the investors.
“The size of mutual fund regulation is likely to be halved if the proposals are cleared in this form,” said a person who was consulted before the making of the proposed regulations.
Proposed Simple & Easy Changes For Removing Ambiguity
The person also added that proposed regulation will be simple and easy for everyone to understand and remove ambiguity.
Besides this, SEBI has also proposed that exit load related 5 bps expense be removed.
SEBI said the provision for additional expense of 5 bps allowed the AMCs to charge the mutual fund schemes and was transitory in nature.
This move is with an objective to rationalize cost for unitholders, so this expense charged to the scheme has been removed from the draft MF Regulations, SEBI noted.
It appears that the first two slabs of the expense ratio of open-ended active schemes have been revised upward by 5 bps in order to reduce the impact of the proposed change on the operations of AMCs.
In a similar effort, brokerage caps have been reduced to 2 bps for the cash market and 1 bps for derivatives.
“To protect the interest of investors and to ensure that expenses are charged fairly only once to the investors, 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,” mentioned in the consultation paper.
There is a chance that this cap may have implications for arbitrage funds who do the frequent churning.
“These changes are expected to strengthen investor understanding and comparability of schemes’ cost structures,” said another person who has been part of the regulation making process.