Mutual Funds: SEBI Mulls Uniform Expense Ratio

Markets regulator Securities and Exchange Board of India (SEBI) is looking forward to introducing a uniform expense ratio in the case of mutual funds. The move aims to reign in mis-selling of mutual funds. Typically, whenever a policy seller or an agent sells a policy prioritising their gain instead of the benefit of the investor, it is a situation of mis-selling.

An expense ratio or total expense ratio (TER) is an annual fee charged to investors of a mutual fund. It’s expressed as a percentage of assets. For instance, if an investor invests Rs 10,000 in a mutual fund, which has an expense ratio of 1.1%, then Rs 110 is taken out on an annual basis by the asset management company (AMC) or fund house to pay for different operating expenses. The expense ratio is the total amount of annual expenses incurred by the mutual fund, which includes the management fee and operating expenses such as the registrar and transfer agent fee, audit fee, custodian fee, and marketing, and distribution fee.

Such expenses are divided by the assets under management (AUM). In simple terms, the expense ratio is the per-unit cost incurred in managing the mutual fund. The net asset value (NAV), which an investor witness daily, is calculated after deducting these expenses. However, the expense ratio of a particular mutual fund is disclosed once every six months only.

The expense ratio ranges between 0.75% and 2.5% of the net investment. For example, the expense ratio for equity funds can be a maximum of 2.5%, while a debt fund can charge 2% on an annual basis of the daily net assets. 

So, the capital markets regulator wants the fund houses to charge the same expense ratio for the different categories of mutual funds now.