Mumbai: Do you invest in a mutual fund? Have you started systematic investment plan (SIP)? If you have, a lot has changed for your mutual fund this year starting from—slash in expense ratio, re-categorisation of schemes and ban in commission and distribution fees. If you are wondering how these regulatory changes impacts you, here is how:

Drop in expense ratio

In September, the regulator Securities and Exchange Board of India (Sebi) slashed total expense ratio (TER) for all mutual funds. In case of open-ended equity schemes, TER was slashed from 1.75%-2.5% to 1.05%-2.25% across assets under managements (AUMS). In case of debt funds, the TER was cut to 0.8%-2% from 1.50%-2.25%. The slabs have also been revised this year for expense ratio. For index funds and exchange traded funds, the TER was reduced to a maximum of 1% from 1.5%. Within the closeended funds, TER for equity-oriented schemes will be a maximum of 1.25% and for other than equity oriented schemes will be a maximum of 1%. Expense ratio is the annual fee that fund houses charge for managing your money. All the fund houses incur a cost for managing mutual funds. Hence, they charge from a portion of the funds to cover for their expenses. The reduction in expense ratio means now you are paying lower cost for your mutual funds. “The reduction in expense ratio will benefit the consumer. Earlier their returns were being affected due to higher expense ratio but now the reduced expense ratio is beneficial," said Prasad Shetty, chief executive officer of Mumbaibased S9 Financial Planners. For fund houses it means the distribution cost will be affected. “While in the short term this may affect distributors, as an industry, we will need to look at disruptive distribution ideas which can lower costs," said D.P. Singh, executive director, SBI Mutual Fund. It may also be the end of close-ended funds. “Close-ended funds will stop. Reduction of TER in close-ended funds was down y 50% so they have almost stopped launching. These funds had higher incentives and led to mis-selling," said Nilesh Shah, managing director of Kotak Asset Management Co. Ltd. In 2018 there was a sharp increase in close-ended schemes. This year 471 closeended schemes were launched till November compared with 210 schemes in 2017 in the same period, according to data by Association of Mutual Fund (AMFI).

Re-categorisation

In April, Sebi re-categorized mutual funds into five: equity, debt, hybrid, solution-oriented and other schemes—index funds, exchange traded funds and fund of funds within which 36 categories of fund schemes have been allowed. “Earlier, there were no Sebi defined categories as such and fund managers could launch schemes at their own discretion," said Suresh Sadagopan, founder of Ladder7 Financial Advisors. According to the new regulation, asset management companies can have only one scheme per category. For example, HDFC Premier Multicap funds was merged with HDFC Balanced Fund and named as HDFC Hybrid Equity Fund, which is categorised under aggressive hybrid fund. Now, HDFC Prudence, which was earlier an aggressively run balanced fund got merged with HDFC Growth, earlier a small equity-oriented fund, and now it is called HDFC Balanced Advantage Fund which is placed in the balanced advantage category.

“Now all the funds are on the same footing. Earlier the names were ambiguous. What was a large cap fund for one fund house was a multi cap for someone else and large-mid cap scheme for another fund," said Shah.

What does it mean for you?

“Recategorisation has made it easier for investors to differentiate between schemes as it has done away with the clutter and duplication of funds. Earlier the names were ambiguous but now the customers know what to expect," said Swarup Mohanty, chief executive officer of Mirae Asset Global Investments (India) Pvt. Ltd.

However, if you are not able to pick the right one for your financial goals, you should seek help from a financial planner.

Close