Sebi mutual fund fee changes: Sebi proposes major changes to mutual fund fee structures for increased transparency and efficiency

Mumbai: India’s capital markets regulator has proposed changes to mutual fund fee structures in a bid to make them more transparent and cost-efficient for investors, as part of a comprehensive review of the country’s mutual fund regulations – the first such revamp in nearly three decades.

This will bring down base expense ratio of open ended equity mutual fund schemes by 15 basis points, and close end equity mutual fund schemes by 25 basis points.

In a consultation paper released on Tuesday, the Securities and Exchange Board of India (Sebi) said the proposed amendments aim to ensure investors benefit more directly from the economies of scale in the ₹75.6 lakh crore industry. Public comments on the proposals have been invited until November 17.

Among the key proposals, Sebi plans to remove the additional 5 basis points (bps) that fund houses were allowed to charge across schemes.

“With an objective to rationalise cost for unitholder, this expense charged to the scheme has been removed from the draft MF Regulations,” the regulator said. The 5-basis point levy, introduced in 2012 when the exit load structure was changed, was meant to help AMCs recover distribution and marketing costs.

To soften the impact of the move on fund houses, Sebi said “the first two slabs (lower AUM bracket) of the expense ratio of open-ended active schemes have been revised upward by 5 bps.” This means fund houses managing smaller schemes can recover part of the lost revenue. In another move, Sebi has proposed that all statutory levies, including the securities transaction tax (STT), goods and services tax (GST), stamp duty and commodity transaction tax (CTT), must be kept outside the total expense ratio (TER) limits.The regulator said this would “facilitate greater clarity and transparency” and ensure that any future change in statutory levies is directly passed on to investors. Sebi has also proposed to reduce brokerage and transaction costs, which is borne by investors. Currently, mutual funds can levy up to 12 bps for cash market transactions and 5 bps for derivatives trades.

The regulator now proposes to cut these to 2 bps and 1 bps, respectively. Citing concerns of double charging, Sebi said: “Investors may often end up paying twice for the research, i.e., one which is charged as part of investment management and advisory fees…and another which is covered under brokerage and transaction cost.” Further, all statutory levies such as STT, CTT, GST and stamp duty incurred for execution of trades will be outside the expense ratio limits. This means that these can be charged over and above the capped brokerage costs. The regulator has also proposed that fund houses make detailed disclosures of the total expense ratio, with clear breakups of all relevant heads, to enhance transparency.