Mutual Fund Update: Expense Ratio
The market regulator, Sebi continues to rationalise and bring more transparency in the way expense ratio is charged by the mutual fund houses. A week ago, Sebi had asked them to prominently disclose total expenses charged to customers on daily basis for all schemes under a separate head on their websites as well as industry body AMFI website.
Now, in its latest circular, contrary to the expectation, Sebi has continued with the earlier expense ratio slab. The fund houses can now charge base expense ratio up to 2.5 per cent on the equity dedicated funds, while for debt funds the maximum limit will be 2.25 per cent. It was expected that Sebi will bring down the maximum limit of expense ratio charged.
Nevertheless, there were some changes in the additional expenses charged by fund houses towards, B30 (beyond top 30 cities) expansion and exit loads. The Sebi has revised the definition of top cities (the terms and definitions of '15 cities', 'T15' and 'B15' have been substituted with '30 cities', 'T30' (top 30) and 'B30', respectively at the start of this year) and beyond top cities for additional TER, it has reduced expenses charged in lieu of exit to 0.05 per cent.
Apart from these additional charges, fund houses can also charge up to 0.12 per cent for cash market transaction and 0.05 per cent for a derivative transaction as brokerage and transaction cost for execution of the trade.
Now the total expense ratio (TER) will include the following heads
Base TER excluding all other additional expenses
Additional Expenses not exceeding 0.30 per cent in terms of gross inflows from specified cities
Additional Expenses not exceeding 0.05 per cent in lieu exit loads (earlier 0.20 per cent) present GST rate is 18 per cent.
Besides the above expenses, fund houses can charge brokerage and transaction costs which are incurred for execution of trade and is included in the cost of investment, not exceeding 0.12 per cent in case of cash market transactions and 0.05 per cent in case of derivatives transactions.