NEW DELHI: Market regulator Securities and Exchange Board of India (Sebi) on Tuesday took host of measures which will make it easier for investors to participate in the stock market both directly and through mutual funds. While both asset management companies and stock trading companies are busy luring the investors, there is a need to decode what it means for the retail investors of various mutual fund schemes.
Total expense ratio
SEBI has capped the Total Expense Ratio (TER) for fund houses with equity assets of up to Rs 50,000 crore at 1.05 per cent, against as much as 1.75 per cent earlier. The TER is the amount investors pay to Asset Management Company in terms of fund management fees, agent commissions, registrar fees, selling and promoting expenses. So if you are investing Rs 1 lakh over 10 years at the rate of 15 per cent, your return will grow to Rs 4.05 lakh. But if TER is 1.5 per cent, your actual total returns would be Rs 3.55 lakh, nearly 14 per cent lesser. So with Sebi putting a cap means every year you have to pay less for the expense and which will also mean better returns.
Navin Chandani, chief business development officer, BankBazaar said, “The charges that investors pay to mutual funds houses to manage their money will now be reduced by around 10 basis points to as high as 60 basis points in some cases. This means marginally higher returns for investors.”
This also means you are acquiring more number of mutual fund units whose values will presumably appreciate with time.
Trail model
Another good news for the investors was that Sebi has asked the mutual fund industry to adopt the full trail model of commission on all schemes. The trail commission means that commission is paid every year only for as long as an investor remains invested with that scheme. It would benefit distributors if their clients stay invested in schemes for a longer period, thereby doing away with the rampant practice of mis-selling and portfolio churn, which is a common practice so far.
While this is a win-win situation for the investors, experts claim that large AMCs will be impacted and distribution chain will be hit and the mutual fund market share will shift to small players.
“This will cause a pressure on the distribution network. One of the immediate fallouts, therefore could be distributors would start pushing schemes from smaller AMCs, where the scope for earning commissions would be higher,” says Aashish Somaiyaa, chief executive officer, Motilal MF.
Apart from that Sebi also capped the fees for exchange-traded funds (ETFs) at 1 per cent. So TER now cannot exceed 1.25 per cent for equity-oriented schemes, and 1 per cent for schemes other than the equity-oriented ones.