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The expense ratio is a recurrent expense you incur when you invest in mutual funds. It is the fee you, as an investor, pay to the fund manager (AMC) for managing your assets. It is a certain percentage of the overall assets (NAV). However, this is subject to change. India’s market regulator, Securities & Exchange Board of India (SEBI) and Association of Mutual Funds in India (AMFI) have made specific common guidelines to AMC’s on how and to what extent they can charge the expense ratio. This move is to protect the interest of investors.
SEBI Specifications & Updates
It is SEBI that specifies the maximum expense ratio that any fund can impose on investors. The returns you earn are credited after deducting the expense ratio. In the recent board meeting in September 2018, they stated that the purpose of any shift in the Total Expense Ratio (TER) of mutual funds is to ensure transparency as well as bring down mis-selling.
What does this mean for you as an investor
Here are some of the key changes in Expense Ratios introduced by SEBI.
Transparency in expenses:
Every commission, expense, etc., shall essentially be disbursed from the fund only and not from the fund house or distributor.
Total Expense Ratio (TER):
| Assets Under Management or AUM (In crores) | TER for equity and equity-oriented funds | TER for other funds (except Index, ETFs and FoFs) |
| 0 to 500 | 2.25% | 2% |
| Between 500 and 750 | 2% | 1.75% |
| Between 750 and 2000 | 1.75% | 1.50% |
| Between 2000 and 5000 | 1.60% | 1.35% |
| Between 5000 and 10,000 | 1.50% | 1.25% |
| Between 10,000 and 50,000 | With every increase of 5000 Cr in AUM, a decrease of 0.05% of TER applies | With every increase of 5000 Cr in AUM, a decrease of 0.05% of TER applies |
| More than 50,000 | 1.05% | 0.80% |
After implementing the above, the trustees and fund house board members will monitor the procedures by the AMCs and shall send reports to SEBI in intervals.
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