Mutual Funds

Post-SEBI diktat, expenses charged by MFs fall

Dhuraivel Gunasekaran BL Research Bureau | Updated on April 14, 2019 Published on April 14, 2019

But a fifth of direct plans of equity schemes turn costlier

Mutual fund investors have a reason to smile. With SEBI’s new rules on Total Expense Ratio (TER) going into effect from April 1, most schemes have cut the expenses they charge for managing their funds.

An analysis of data from the Association of Mutual Funds in India reveals that all the regular plans of equity funds have reduced the expense ratio by an average of 13 basis points (bps), or 0.13 per cent.

In September 2018, SEBI had sought to rationalise the expenses charged by mutual funds, based on their asset sizes. This has caused a marked reduction in some slabs.

For instance, the TERs of open-ended equity funds with Assets Under Management (AUM) of ₹2,000-5,000 crore and ₹5,000-10,000 crore have been trimmed by 1.6 and 1.5 per cent respectively.

For debt funds, the TER was pegged 25 bps lower than the expense ratio for equity funds in the corresponding slabs.

Mutual funds have had to reset their expense ratios to conform to the new rules from April 1. We analysed the effect of the new rules on the TERs of 278 open-ended equity funds by comparing the daily average expense ratio for March with the reported expense data as on April 3, to see the impact on individual schemes.

We found that funds with larger AUMs recorded larger cuts in their expense ratios. For instance, the regular plans of equity funds with AUM of ₹10,000-21,000 crore, such as ICICI Prudential Value Discovery, ICICI Prudential Bluechip and Kotak Standard Multicap, saw a reduction of around 30 bps in their expense ratios.

Passing on benefits

A 30 bps cut in the expense ratio will save around ₹300 annually in an investment of ₹1,00,000. This can add to the return.

The regular plans of equity funds with asset size up to ₹500 crore saw a reduction of 10 bps. Similarly, equity funds with assets of ₹500-1,000 crore and ₹1,000-2,000 crore cut their expense ratios by 5 and 6 bps respectively.

 

 

Turning costlier

Surprisingly, the direct plans of equity funds in the ₹500-1,000 crore and ₹1,000-2,000 crore slabs saw increases in charges. The direct plans in the Tata India Tax Savings, Principal Emerging Bluechip, IDFC Tax Advantage, Tata Multicap and Tata Equity P/E saw a hike in the expense ratio by 20-64 bps. Of the 278 equity funds, the direct plans of 52 funds witnessed an increase in the expense ratio by 1-51 bps. SEBI’s recent mandate — that all the scheme-related expenses should be paid from the scheme and not from the book of AMCs — seems to be the primary reason for the increase in the TERs.

Hybrid funds with large AUMs of more than ₹10,000 crore, including HDFC Balance Advantage, ICICI Prudential Balanced Advantage and SBI Equity Hybrid, saw a cut in TER of 2-37 bps.

 

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