Why you should worry about the cut in mutual fund distributors’ fee
With AMCs passing the expense ratio cut to distributors, the latter may churn investors for higher fees
There is wide variation in the commission structure of various schemes and mutual fund houses
At a board meeting on 18 September 2018, capital markets regulator Securities and Exchange Board of India (Sebi) cut the maximum total expense ratio (TER) that mutual funds can charge. Maximum expense ratios were set for funds based on their size. For example, an open-ended equity fund with assets under management (AUM) up to ₹500 crore cannot charge more than 2.25% as expense ratio, while an equity fund with assets between ₹500 crore and ₹750 crore cannot charge more than 2%. The regulatory rationale was that costs do not increase in proportion with size and, hence, the benefits of economies of scale should be passed on to the investors. The impact of the cut in expense ratio could be shared between the asset management company (AMC) and the distributor.