Sebi changes total expense ratio (TER) of mutual funds

Sebi, in its board meeting on September 18, 2018, anounced changes in the total expense ratio (TER) of mutual funds. It made the changes to bring in transparency in appropriation of expenses, and reducing mis-selling and churning. The changes are as below:

Transparency in expenses: All commission and expenses, etc. shall necessarily be paid from the scheme only and not from the AMC/Associate/Sponsor/Trustee, or any other route. Further, Sebi said that the mutual fund industry must adopt the full trail model of commission in all schemes without payment of any upfront commission or upfronting of any trail commission.

Total Expense Ratio: The total expense ratio (TER) will be as follows:

AUM (Rs crore)	TER for equity-oriented schemes (%)	TER for other schemes (excl. Index, ETFs and Fund of Funds)
0 - 500	2.25	2.00
500 - 750	2.00	1.75
750 - 2,000	1.75	1.50
2,000 - 5,000	1.60	1.35
5,000 – 10,000	1.50	1.25
10,000 – 50,000	TER reduction of 0.05% for every increase of 5,000 crore AUM or part thereof	TER reduction of 0.05% for every increase of 5,000 crore AUM or part thereof
> 50,000	1.05	0.80

In case of close-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 1.00 per cent.

The TER for index schemes, Exchange Traded Funds (ETFs) and Fund of Funds shall be maximum of 1.00 per cent. The TER for fund of funds (FoFs) shall be a maximum of twice the TER of the underlying funds.
- FoFs investing primarily in Liquid, Index and ETF schemes: Total TER (including the TER of underlying schemes) shall be maximum of 1.00 per cent.
- FoFs investing primarily in active underlying schemes: Total TER (including the TER of the underlying schemes), shall be maximum of 2.25 per cent for equity oriented schemes, and maximum of 2 per cent for other than equity oriented schemes.

Additional expenses of 30 bps for penetration in B-30 cities: The additional expense permitted for penetration in B-30 cities, shall be based on inflows from retail investors. The definition of ‘retail investors’ shall be determined in consultation with the industry. Pending such clarification, the additional incentive shall be permitted for inflows from individual investors only and not on inflows from corporates and institutions. Further, the B-30 incentive shall be paid as trail only.

Performance Disclosure: Adequate disclosure of all schemes’ returns (category wise) vis-à-vis its benchmark (total returns) shall be made available on the website of AMFI.

Upon implementation of the above decisions, the trustees and AMC boards shall monitor the implementation by the respective AMCs and shall report to SEBI periodically, says Sebi in its board meeting report.