SEBI bans upfront commission and rationalises TER
The market regulator Securities & Exchange Board of India (SEBI) in a further step towards reducing the intermediary cost of mutual fund distribution has banned upfront commission paid to mutual fund distributors. Now all the commission paid to the distributors by fund houses will be the full-trail model based on investments by clients. Now the payment of upfront commission is allowed only in case of a systematic investment plan (SIP), subject to certain conditions. The SEBI board has also further clarified that fund houses will have to pay such commissions from the scheme and not from the AMC book.
Going a step further, SEBI has even taken steps to rationalise the total expense ratio (TER). The idea behind the rationalisation of the TER is “sharing of economies of scale, lowering the cost for mutual fund investors, bringing in transparency in an appropriation of expenses, and reducing mis-spelling and churning.” The TER for closed-ended equity-oriented schemes will be a maximum of 1.25% and for other than equity-oriented schemes, it will be a maximum of 1%. SEBI has also clarified that the additional expenses of 30 bps for penetration in B30 cities is applicable only for assets of retail investors.
New TER Slab
| AUM Slab (INR crore) | TER for equity-oriented scheme | TER for other schemes (excl. Index, ETFs and Fund of Funds) |
| 0-500 | 2.25% | 2.00% |
| 500-750 | 2.00% | 1.75% |
| 750-2000 | 1.75% | 1.50% |
| 2,000-5,000 | 1.60% | 1.35% |
| 5000-10000 | 1.50% | 1.25% |
| 10000-50000 | TER reduction of 0.05% for every increase of 5,000 crore AUM or part thereof | TER reduction of 0.05% for every increase of 5,000 crore AUM or part thereof |
| >50,000 | 1.05% | 0.80% |
Impact
The comprehensive impact of the abovementioned changes for each stakeholder is likely to occur in the next few quarters and years. However, if the stock market is believed to be discounting the future, it will have a negative impact on at least the fund houses. The two listed AMCs have witnessed a fall of more than 8% in today’s trade.
Some of the fund houses that were aggressive in launching closed-ended funds will find coming out with new offers no longer lucrative. The rationalisation will also reduce the expense ratio between the direct plan and regular plan. Nevertheless, it might reduce the earnings of the various mutual fund distributors too, which might encourage them to sell other competitive products such as PMS and insurance.
We believe it is a step in the right direction as it will help usher in more transparency in the mutual fund industry and will help the industry to grow in long run.