What will be the impact on the expenses of mutual funds after the implementation of Base Expense Ratio system? (symbolic photo)
highlights
- SEBI has now divided the expenses of mutual funds into four parts.
- The first part of mutual fund expenses will be brokerage and legal levies.
- The second part of mutual fund expenses will be from regulatory levy.
SEBI introduced base expense ratio, know what is it?
SEBI has said that the expense ratio will now be called Base Expense Ratio or BER. This will show the main fees charged by the mutual fund scheme for running the fund. This will not include legal and regulatory levies.
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Charges like Securities Transaction Tax, Commodity Transaction Tax, GST, Stamp Duty, SEBI Fees and Exchange Fees will no longer be included in the BER limit. Instead, these will be charged separately on the actual amount, in addition to the base expense ratio and brokerage.
In simple words, the total expense ratio will now be a combination of four parts: base expense ratio, brokerage, regulatory levy and legal levy. This makes the cost structure more transparent, even if it does not automatically mean a significant reduction in the amount investors pay.
SEBI reduced the limits of base expense ratio
Along with this, SEBI has reduced the base expense ratio limits in all categories. For index funds and exchange traded funds, the revised base expense ratio has been capped at 0.9% as against 1% earlier including statutory levies.
Fund-of-funds that invest mostly in index funds or ETFs will also have a cap of 0.9%. The base expense ratio limit for fund-of-funds investing more than 65% in equity-oriented schemes will be reduced from 2.25% to 2.10%, while other fund-of-funds will come down to 1.85% from 2%.
Strict limits have also been imposed on closed-ended schemes. The base expense ratio limit for equity-oriented closed-ended funds will now be 1%, up from 1.25% earlier, while non-equity closed-ended schemes will have a limit of 0.8%, up from 1% earlier.
SEBI has clarified that these revised limits have been adjusted over the earlier consultation proposal to ensure that there is no undue burden on asset management companies, and the net effect largely reflects the removal of statutory levy from the base expense ratio and not a drastic reduction in fees.
SEBI also rationalized brokerage limits
Another important change is the rationalization of brokerage limits. In cash market transactions, the earlier brokerage cap of 12 basis points included statutory levies. After the levy is removed, the effective brokerage component was around 8.59 basis points. SEBI has now further reduced it to 6 basis points, which does not include levies. For derivatives, the effective brokerage cap has been reduced to 2 basis points from around 3.89 basis points earlier. This is expected to reduce trading-related expenses over time, especially in actively managed funds.
SEBI has also removed an additional expense allowance of 5 basis points, which was earlier given for schemes charging exit load. This allowance was temporary and has now been withdrawn, closing a window through which schemes could charge higher costs.
Apart from expenses, the regulator has focused on simplifying compliance while maintaining oversight. Reporting requirements have been simplified, with fewer mandatory trustee meetings and the removal of separate half-yearly portfolio disclosures.
SEBI has also eased borrowing norms, allowing equity-oriented index funds and ETFs to borrow for execution-related needs and clearing the use of intra-day borrowings to manage mismatches in redemption timings.
Will investing in mutual funds become cheaper?
Investors may not see a huge drop in expenses overnight, as statutory levies will still be paid separately. However, lower base expense ratio cap, strict brokerage limits and removal of additional allowances will help prevent hidden expenses from mutual funds and improve cost discipline over time. More importantly, investors will get a clearer picture of what they are paying for, which can help them make better-informed investment decisions. In such a situation, mutual fund investors who stay invested for a long time should expect to get slightly higher returns. This may happen because when the expenses of mutual fund companies reduce, more money of investors will remain invested. Due to this, returns may appear to increase slightly in the long run.
Disclaimer: All mutual fund investments are subject to market risks; ET Swadesh NOW advises all its readers, viewers and listeners to read all scheme documents carefully and seek advice from registered financial advisors before taking any money and investment related decisions.
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