Cap on MF charges to kick in from April

In an overhaul of the fee structure that mutual funds (MFs) charge from investors, the markets regulator has capped total expenses for MF schemes with effect from April 1, 2019.

Rationalising the total expense ratio (TER), the fee that MFs collect from investors every year to manage their money, the Securities and Exchange Board of India (Sebi) has set 2.25 per cent as the upper ceiling for such charges.

The Sebi board had cleared a proposal in this regard in September.

The regulator has capped the maximum TER for closed-ended equity schemes at 1.25 per cent, and other equity schemes at 1 per cent. The maximum TER for open-ended equity schemes will be 2.25 per cent, and 2 per cent for other open-ended schem-es, Sebi said in a notification dated December 13.

TER is a percentage of a scheme's corpus that a MF house charges towards expenses, including administrative and management.

The TER was introduced in 1996 and since then, it has not been changed. Over a period, there have been varying practices in the industry with respect to charging of payments and commissions.

With regard to open-ended equity schemes, Sebi said that the highest expense ratio allowed to be charged for the first Rs 500 crore of assets will be 2.25 per cent. As the AUM increases, the expense ratio will have to come down.

For the next Rs 250 crore, it will be 2 per cent; for further Rs 1,250 crore, it will be 1.75 per cent; for the next Rs 3,000 crore, the fee will be 1.6 per cent; and again on the next Rs 5,000 crore of the daily net assets, the charge will be 1.5 per cent.

In the case of equity mutual funds with daily net assets of Rs 40,000 crore, the total expense ratio will be a decline of 0.05 per cent for every increase of Rs 5,000 crore of daily net assets.