Home/ Mutual Funds / Which mutual funds can get cheaper post Sebi’s TER proposals?

A research note issued by Fisdom, a mutual fund distribution platform, has analysed the impact of Sebi’s recent Total Expense Ratio (TER) consultation paper on the mutual fund industry. The note has found that roughly 45% of equity schemes, 31% of debt schemes and 41% of hybrid schemes can get cheaper if the SEBI proposals are implemented in their current form.

The proposals envisage the replacement of scheme-wise TER with asset-class-wise TER. This means there will be a single cap for equity mutual funds, another one for debt and a proportional one for hybrid funds (depending on their equity-debt split). SEBI has also proposed that costs which currently sit outside TER caps such as additional TER for beyond 30 cities flows, and additional TER in lieu of exit load and brokerage should be brought into TER.

First, let’s understand what the existing TER structure is. Under existing Sebi rules, equity funds have a graded TER cap which comes down as the scheme gets bigger. At the lowest size, the cap is 2.25% and it gets lower and lower as a scheme grows bigger. The same principle is followed for hybrid and debt funds.

However, this incentivised mutual funds to launch numerous small schemes and charge a high TER on them rather than keeping just a few schemes and directing flows into them (this would have lowered the TER cap). The new proposals would see this scheme-level cap being replaced by an asset-level cap. This asset level cap for equity schemes starts at 2.55% and falls progressively as the fund house’s AUM in that asset class falls over time.

The 2.55% starting TER cap is optically higher than the existing cap. However since additional costs such as brokerage and TER for beyond 30 cities inflows are being brought inside the cap, the actual TER can go down for many schemes. According to Fisdom’s calculations, the maximum impact will be felt on thematic and sectoral funds since these tend to be small and have the highest TER charged on them.

MF categories to be affected by SEBI's TER proposal
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MF categories to be affected by SEBI's TER proposal

As per these calculations around 79% of such schemes have a TER that exceeds Sebi’s proposed TER cap. Within hybrid funds, BAFs and aggressive hybrid funds will see the most impact and within debt funds, the credit risk category will see the strongest impact (reduction in TER).

“After the Sebi categorization and rationalisation exercise of 2017, most mutual funds were allowed to only launch 1 scheme per category. The exception was sectoral/thematic funds. That is why there are so many sectoral and thematic funds," said Nirav Karkera, Head of Research at Fisdom.

In general, investors in smaller schemes regardless of category will benefit the most if the Sebi proposals are implemented.

Neil Borate
Neil heads the personal finance team at Mint. A former colleague called them 'money nerds' and that's what they are. They cover topics like mutual funds, taxation and retirement, all to improve your chances of building wealth. Neil graduated with a degree in law and economics. He passed the CFA Level I exam and began his writing career at Value Research, a mutual fund research firm in 2016. He joined the personal finance team Mint in 2019. Everyday, the Mint Money Team tackles personal finance questions such as where to invest and where to borrow, through articles, charts and reader queries. They also have a daily podcast - 'Why Not Mint Money' and an annual ranking of mutual funds - the Mint 20.
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Updated: 26 May 2023, 08:41 AM IST
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