Proposed TER rationalisation can unlock investment-led growth

INDIA'S MARKET INFRASTRUCTURE has reinvented itself with each technological leap. This evolution has been matched by an extraordinary deepening of mutual fund participation.

- @ DR RACHANA BAID & DR V SHUNMUGAM

Over the past decade, folios have expanded nearly sixfold — from approximately 39 million to over 234 million —and the industry AUM has grown from %8 trillion to more than %75 trillion, compounding at an annual rate of over 20%.

Yet, despite this surge in scale and digital efficiency, total expense ratios (TERs) have remained largely unchanged, often clustering near regulatory ceilings, particularly for equity funds that derive more than 80% of their assets from individual investors.

So, a review of TERs is not just timely, it is essential to ensure that the benefits of scale flow back to investors and strengthen India’s investment led growth engine.

TER review is essential to ensure benefits of scale flow back to investors and boost investmentled growth engine

Sebi’s recent proposal to revise TER norms directly addresses this imbalance. The proposal removes the extra 5 basis points (bps) fee allowed for schemes with exit loads. It also reduces the permissible brokerage limits — dropping them to 2 bps for cash market transactions and 1 bps for derivatives — while excluding statutory charges, such as GST, STT, and stamp duties, from TER caps.

How much could this move boost investments?

While the exact behavioural response of investors to lower TERs depends on multiple factors, the primary effect is immediate savings. Consider this: A 5-bps reduction on an AUM of %77.78 trillion results in annual investor savings of about %3,889 crore. Add indirect benefits from reduced brokerage and transaction costs to this, and total savings could conservatively reach 7,000 to 8,000 crore per year. If even a portion of these savings — say 60% — is reinvested within the investment ecosystem through mutual funds or related financial instruments, it could generate additional flows of nearly 5,000 crore.

The growth effect: Multiplying the momentum