SEBI has proposed a radical change in the expenses charged from mutual fund investors

The market regulator has proposed that TER should be calculated at the AMC (asset management company) level instead of at the scheme level. According to the regulator, this will encourage more competition and help smaller AMCs, as well as pass on the benefits of economies of scale to investors.

SEBI also proposed the idea of ​​performance-based TER and put forward two approaches (more on that later), but said the new concepts could first be tested in a regulatory sandbox framework.

The regulator also reviewed the AUM (assets under management) slab-wise structure, which determines the TER charges in the existing framework.

For the new framework, SEBI has proposed that at the AMC level, a maximum TER for an equity scheme may be imposed at 2.55%. This limit is available for AMCs that fall under the first AUM slab (up to 2,500 crores).

The maximum allowable TER rate has been raised slightly by SEBI from 2.25%, but this is to allow the mutual fund industry to adjust the TER for absorption of GST (Goods and Services Tax) borne on investments and advisory fees. Has been done

All charges within TER

SEBI wants AMCs to charge all additional expenses within the TER to encourage uniformity and transparency.

On charging brokerage and transaction charges by the AMCs as additional expenses in the MF scheme, the regulator was of the view, “It is observed that the AMCs have executed trades through brokers who were not part of the top brokers (in terms of percentage shareholding). in terms of) the gross turnover of the stock exchange) and offered the services at higher brokerage cost as compared to other listed brokers. If such higher transaction cost is for research report, then the arrangement cannot be treated as soft dollar arrangement. And investors have to pay twice for research, one which is charged as part of investment management and advisory fees and the other which is covered under brokerage and transaction costs.”

SEBI has even proposed that AMCs may be allowed limited membership of stock exchanges to cover their transaction costs, as the mutual fund industry has expressed that TER-level limits are too restrictive for fund managers. may discourage investors from churning the portfolio for the benefit of the scheme’s investors.

“Considering the AMC fee management and advisory fee for management of scheme assets, which should ideally include the cost of research for selection of assets/securities for any scheme, it is difficult to understand that brokerage and transaction Why do significant expenses need to be expensed separately for costs? Fees are charged by the fund houses to the investors in the name of research. Thus, charging brokerage and transaction cost, which includes the cost of research, is not only double charging the unitholders, but also induces certain undesirable practices affecting the interest of the unitholders,” the paper read.

SEBI also reviewed the proposed performance-based TER, among other things, for B30 (beyond top-30 cities) incentives, commission on new fund offers (NFOs) to avoid churn.

B30, NFO, Display

SEBI has proposed that if investors are switched from an existing scheme to NFO, commission will be charged as per the original scheme.

For example, if the switch is between Scheme A and Scheme B, where the commission payable for Scheme A is 1% and for Scheme B is 1.5%, the commission of Scheme A will continue to be applicable even after the switch.

As per SEBI, it is observed that in order to avail the B30 incentives, the practice is to divide the investor application amount under 2 lakh-limit. B30 Incentive is applicable only if the investment is within the limit 2 lakhs.

The paper states, “B-30 investors’ investments are often churned through withdrawals and re-investment after one year (a minimum holding period of one year is required), resulting in plans for the same investment Additional cost is charged.”

These charges are also based on estimates. SEBI has proposed that the charges are on actual flows and not on estimates.

“Such additional commission may be fixed at the first application size or industry level at 1% of the amount committed through SIP of the individual investor, subject to a maximum of 2000,” SEBI added in its paper.

SEBI has also found that there is a discrepancy in the flat cost of the regular plan and the direct plan (investors bypass distributors and do not charge commission).

SEBI has also proposed performance based TER. It proposed two approaches.

“A base expense ratio may be charged from the investor during the period during which the investor remains invested. At the time of redemption, a management fee may be charged if a return is generated in excess of the indicative rate or the annual return received by the investor is higher than the hurdle rate. A maximum management fee may also be specified to discourage fund managers from taking unwise risks to earn higher fees. The NAV paid at the time of redemption may be netted for management fee and The balance amount can be paid to the investor.”

SEBI also suggested another method.

“Another approach could be where a higher expense limit could be fixed for the performance-based TER and the TER including management fee is charged to the investor. In such cases, the TER to be charged by the schemes should be based on the performance of the schemes during the previous year. At the time of redemption by the investor, if the AMC fails to generate a return higher than the indicative return to the investor or the annualized return to the investor is less than the Hurdle Rate decided in advance, the AMC may retain the base TER, as per that may apply and return. Along with the redemption amount, the remaining expenses are charged to the investor.”

SEBI said that this being a new concept, it may first be tested in a regulatory sandbox. A regulatory sandbox is where SEBI regulated entities can experiment with new solutions and products in a live environment.

SEBI also proposed any TER change by the AMC to trigger an exit window for the investor.