What you need to know about changes in total expense ratio of mutual funds

Of late, mutual fund investors have been receiving regular emails from fund houses explaining the changes in total expense ratio (TER) of their mutual fund schemes. To understand how these TER changes affect you, let us see why this is happening now. Market regulator Sebi feels fund houses are making frequent changes in the TER, but these changes are not prominently disclosed to the investors.

Despite the fund houses releasing advertisements in newspapers and hosting copies of these advertisements in their respective web pages, Sebi is calling for more transparency on TER. Sebi came out with a specific circular for this on 5 February.

“Though AMCs used to host these changes on their web pages, it was difficult for investors to find out these changes. Now, it simply reaches your mail box and this significantly increases the transparency,” says Amol Joshi, Founder, PlanRupee Investment Services.


Small changes in TER do not affect returns

The pertinent question to ask here is – should you be worried if the TER is up or should you be delighted if it is down? There is no specific answer to this question because it depends on the quantum of these changes (see table).

As of now, most of these changes are small, in the range of 1-2 bps only. Since this will not have a meaningful impact on overall returns, there is no need for investors to be overly concerned about these changes.

However, they should not ignore them either. “Though there will be some changes in expense ratio due to normal business situations, investors need to keep a watch on these TER changes,” Joshi explains.

Hence, investors need to keep a closer watch, as the emails being sent to them are ‘event based’ and ‘calendar based’. In other words, fund houses will keep on sending emails whenever there is a change in expense ratio and this 1-2 bps change you see is for that specific event. If the fund house increases TER on regular frequency, the cumulative impact can be significant.