Sebi aims to prune costs further for MF investors, may bring GST under TER

GST, transaction charges could be made part of total expense ratio

The Securities and Exchange Board of India (Sebi) is aiming to further reduce the cost of investing in mutual fund (MF) schemes.

Sebi is reviewing the fees and expenses charged by the industry and is planning to direct fund houses to bring all expenses paid by investors within the total expense ratio (TER), people aware of the development said.

At present, the 18 per cent GST on the fund management fee is outside the purview of TER. Further, the expenses incurred while selling and buying of a security or a stock are not included in TER; they are included in the cost of investment. For example, if a scheme buys shares worth Rs 100 and pays a brokerage of Rs 2, then the cost of investment is registered as Rs 102. The regulator plans to bring these costs within TER.

A query sent to Sebi on the issue remained unanswered.

TER is the total expenses incurred by a fund house in managing a scheme. These include sales and marketing expenses, advertising costs, administrative costs, and investment management fees, among others.

The regulator has set upper limits on how much TER a scheme can levy. An active equity fund scheme can charge a maximum TER of 2.25 per cent of the assets under management, while debt schemes can charge up to 2 per cent.

The proposal to make GST and transaction charges part of TER will reduce the cost of investing, but could put pressure on the profit margins of the industry as the regulator may not tinker with the overall caps.

Sources said Sebi was also mulling a proposal to do away with the extra TER it allowed the industry to charge for raking in assets from smaller centres or so-called beyond-30 cities. Market players said many schemes currently charge a TER which is below the maximum permitted by Sebi.

If more heads such as GST are brought under TER, it may prompt fund houses to increase the ratio wherever there is room available, said an industry player.

Over the years, Sebi has endeavoured to lower the cost of investing for MF investors. The last time when the regulator had announced a cut in TER, most AMCs had safeguarded their margins by passing on the cut to distributors. In October 2018, Sebi had brought two changes: one was downward revision of TERs, and second was a ban on upfront commission to distributors.

Since the downward revision of TERs was also passed on to distributors, the industry saw consolidation in the number of distributors. Registration of new distributors declined 51 per cent year-on-year in financial year 2020 and 35 per cent in FY2021, according to a report by ICICI Securities.