MUMBAI: The market watchdog Sebi has proposed a major overhaul of the mutual fund fee structure, including significant changes to how fund houses charge investors, as part of its effort to simplify rules, improve transparency, and reduce the cost for investing in these schemes.
In a 25-page draft proposal released Tuesday seeking stakeholder comments by November 17, Sebi has proposed a comprehensive revamp of the existing mutual fund fee structure by removing additional expenses, tightening brokerage limits, and excluding statutory levies from the overall expense ratio cap.
The 48-player industry began with the lone player UTI in 1963 by an Act of Parliament. It launched its first mutual fund scheme Unit Scheme 1964 (US ’64) in 1964, which went burst in 2000 and had to be bailed out. By 1988, UTI had an AUM of only Rs 6,700 crore, which is now over Rs 75.6 trillion.
One of the key proposals is to remove the additional 5 bps that fund houses used to charge from unit-holders across schemes, saying this charge was introduced as a transitory measure originally meant to cover AMCs distribution expenses when the exit load system was altered in 2012. But to help AMCs whittle down the impact of the removal of the 5 bps fee, Sebi has proposed to increase the first two slabs of the expense ratios by an equal 5 bps in the new fee structure.
“For transparency and investor protection, Regulation 52(6A)(c) which enables mutual fund schemes to charge additional 5 bps on the whole AUM of the scheme for schemes where exit load is applicable/levied. Prior to 2012, exit load charged to the scheme was used by AMCs for payment of distribution commission to the distributors and other marketing /selling expenses. In 2012, MFs were mandated to credit exit load to the scheme and AMCs were allowed to charge additional 20 bps as additional expense to the scheme. The said additional charge was reduced from 20 bps to 5 bps in 2018," said Sebi.
“The provision for additional expense of 5 bps allowed to the AMCs to charge the mutual fund schemes was transitory in nature. Therefore, with an objective to rationalize cost for unitholder, this expense charged to the scheme has been removed from the draft MF Regulations,” it said.
“However, to reduce the impact of the proposed change on the operations of AMCs, the first two slabs of the expense ratio of open ended active schemes have been revised upward by 5 bps,” it added.
The draft further said, “With a view to facilitate greater clarity and transparency, it is proposed to exclude all statutory levies like STT, GST, CTT, stamp duty from the expense ratio limits along with the present permissible expenses for brokerage, exchange and regulatory fees.”
Presently GST on management fees is permitted over and above the TER limit. However, all other statutory charges are part of the overall TER limit specified for mutual fund schemes.
“The expense ratio limits are proposed to be exclusive of statutory levy, so that any changes in statutory levy in future are passed on to the investors. Hence, the expense ratio limits are revised downward to the extent of GST on all expenses other than management fees,” it said.
This means that any changes in the government levies will directly be charged to the investor.
The present regulations permit AMCs to charge brokerage and transaction costs incurred for the purpose of execution of trade up to 0.12% of trade value in case of cash market transactions and 0.05% of trade value in case of derivatives transactions.
Based on analysis of data, it has been observed that the brokerage paid by AMCs for arbitrage funds is generally lower than the brokerage paid for other schemes. For example, the brokerage for arbitrage funds was in the range of 1.18 bps to 1.34 bps during the period April 1, 2023 to March 31, 2024, whereas during the same period the brokerage for other equity schemes was in the range of 5 bps to 12 bps.
The high brokerage charges can be attributed to services other than execution which may include research. As research is inherent to investment management and advisory, a separate limit for the same may not be appropriate. Due to such bundled service arrangements, the investors may often end up paying twice for the research i.e., one which is charged as part of investment management and advisory fees which is charged by AMCs primarily for their expertise/research and management of funds) and another which is covered under brokerage and transaction cost.
“Thus, to protect interest of investor and to ensure that expenses are charged fairly only once to the investors, the brokerage charge has been revised from 12 bps to 2 bps for cash market transactions and 5 bps to 1 bps for derivative transactions to bring clarity and transparency. The limit mentioned above (i.e. 2 bps/1 bps) shall be the limit for brokerage. All other costs relating to execution of transaction may be charged on actual basis,” it said.
Further, all statutory levies are proposed to be outside the expense ratio limits i.e. STT/CTT/GST/stamp duty incurred for execution of trades can be over and above the limit of 2/1 bps.
Sebi also said clarity has been provided on ‘total expense ratio’ which shall clearly include expense ratio (as per the limits specified) plus brokerage, exchange and regulatory fee and statutory levy so that transparency is further enhanced.
