Investing in mutual funds set to get cheaper for investors

Sebi's new proposal can make equity, debt and hybrid schemes of mutual funds cheaper and investors can fetch better returns in the long term

- SACHIN KUMAR

IN its quest to make the mutual fund industry more transparent and reduce the cost of investment for retail investors, the Securities and Exchange Board of India (Sebi) has floated a consultation paper with a raft of proposals related to fees and expenses charged by the Asset Management Companies (AMCs).

In its proposals, the capital market regulator wants mutual funds to cut the cost for investors and bring all the fees and charges under the total expense ratio (TER). If implemented in the current form, the proposal will make investing in the mutual fund a lot cheaper for retail investors and will significantly increase their returns in the long term.

What does Sebi want?

In a consultation paper released last month, Sebi has proposed a uniform TER across mutual fund schemes in a bid to bring transparency in the costs charged to unitholders.

At present, Sebi allows AMCs to charge unitholders of mutual funds four additional types of expenses over and above the specified TER limits. These are brokerage and transaction costs, additional TER for distribution commission for inflows from B-30 (beyond top 30) cities, goods and services taxes and additional expenses for exit loads.

The TER is a percentage of a scheme’s corpus that a mutual fund house charges towards expenses including administrative and management. Sebi has proposed that AMCs should include all additional expenses like GST, Securities and Transaction Tax (STT), brokerage and other charges under TER.