The regulator has also suggested bringing the Goods and Service Tax (GST) on investment and advisory fees charged by mutual funds from investors and brokerages, along with transaction costs that these fund houses pay institutional broking firms for trade execution and incentives for selling beyond the top 30 cities into the proposed total expense ratio (TER) slabs. Sebi has also proposed to introduce a performance fee that mutual funds can charge investors for superior returns.
The recommendations are aimed at bringing down mis-selling and reducing costs of investing in mutual funds.
Sebi has proposed that the total expense ratio slabs should be at the level of the AMC and not at the scheme level. This means all equity schemes belonging to a fund house can charge a TER on the basis of the money managed. The same holds for non-equity assets like debt. Currently, every scheme is allowed to charge a separate TER based on the asset size.
The regulator has proposed to allow mutual funds to charge a maximum TER of 2.55% for equity assets under management of less than ₹2,500 crore. As the asset base goes up, the TER that can be charged comes down.
“Limits on TER are proposed to be kept at AMC level and inclusive of all costs and expenses including GST on management fees, brokerage and transaction costs, B-30 incentive etc,” said the regulator.
Sebi said the new slabs will result in TERs going down by 0.5% to 20% depending on the size of the assets.”Considering that 20% of the AMCs are presently managing around 75% of the industry AUM, and many of the small AMCs continue to be loss making entities, the revised TER slabs are proposed ensuring small AMCs are not at a disadvantage, and to encourage competition amongst AMCs of all sizes, which will be in the interest of investors,” the Sebi discussion paper said.
The revised slabs are proposed with higher TER limits so as to cover all costs and expenses including GST on management fees.
Sebi said for Hybrid and Solution Oriented schemes, the TER would be the weighted average of TER of equity and equity related instruments and TER of other than equity & equity related instruments.
The regulator also proposed that payment of upfront commission by investors directly, and transaction costs deductible from investments of investors would not be permitted as all expenses would now be included in the TER.
It has also proposed to reduce the exit load of an open-ended scheme to a maximum limit of 2%, from the existing 5%.
