The Securities and Exchange Board of India (Sebi) in its board meeting on Tuesday reduced the total expense ratio (TER) by 25 basis points in the top slab for both equity and debt mutual funds. The market regulator said that mutual fund industry should adopt the full trail model of commission in all schemes without payment of any upfront commission or upfronting of any trail commission.
Sebi announced the new slabs of charging TER for equity and debt schemes. For assets under management (AUM) of Rs 0-500 crore TER for equity oriented schemes is 2.25 per cent, for AUM of Rs 500-700 crore it will be 2 per cent, Rs 750-2,000 crore it will be 1.75 per cent and for Rs 2,000-5,000 crore it will be 1.60 per cent. Schemes having AUM of Rs 5,000-10,000 crore will have TER of 1.50 per cent for AUM of Rs 10,000-50,000 crore.
Earlier, Sebi’s MF regulations allowed, the first Rs 100 crore of an equity scheme’s net assets get charged at 2.5 per cent, the next Rs 300 crore at 2.25 per cent, the next Rs 300 crore at 2 per cent and the rest at 1.75 per cent. Debt funds get charged similarly, but the charges are 25 bps lower for each of the slabs. Market participants say that, cost may come down by 20-25 basis for equity open ended schemes. Sebi also said that for closed ended and interval schemes, TER for equity oriented schemes shall be a maximum of 1.25 per cent and for other than equity oriented schemes shall be a maximum of 1 per cent.
Currently, fund houses give upfront commissions from their profits and it is anywhere between 0.75 basis points to 1.25 per cent. While trail commission is around 1 per cent. There are several distributors who take only trail commissions of 1.5 per cent. Upfront commissions were very high for the closes ended equity schemes, and in many cases it went to as high as 5 per cent. Typically, fund houses pay 3 per cent upfront for close ended equity schemes.