Cost of large-asset equity funds to drop drastically

The new financial year begins on a positive note for Indian equity investors as SEBI slashed the old Total Expense Ratio (TER) for costlier equity schemes – starting from 1 April. The industry experts expect a positive shift in the sectoral trends as a result. This is because the mutual fund management fee is one of the top deciding factors that help investors choose a suitable scheme.

For now, this fee-reduction is only for equity schemes with large Assets under Management (AUM), and the smaller-size funds will still attract the same expense ratio as before until further notice.

Financial advisors, however, caution investors against focusing only on the mutual fund fees. Expense Ratio should be just one of the factors to consider. Also, managing equity funds with high AUMs is decidedly tougher than managing smaller funds. So, this price-drop may not ensure better returns all the time.

Towards the end of 2018, Securities and Exchange Board of India (SEBI) declared that it would bring down the TER upper limit to 2.25% for equity and equity-oriented funds. This, they hoped, would ensure that investors will also receive the benefit being part of a fund that grows exponentially. Ideally, TER should come down as a fund’s asset size grows.

Some fund managers welcomed the move saying they would strive to make the fund reach that AUM-threshold, where investors can avail benefits of cheaper equity funds. While a few other opined it might not make much difference to returns as equity funds are not as price-sensitive as debt schemes.

How cost-effective can it get?

On an investment of, say, Rs.1 lakh, you can save Rs.250 to Rs.280 per year. This is added to your total returns. However, this benefit won’t make much difference to those with a short-term investment horizon.