In order to attract investors and distributors to mutual funds (MFs), regulator Sebi is considering a number of proposals. Its board meeting is on now and an announcement on the decisions taken is expected by late evening.
One such proposal being considered is revision of total expense ratio or TER. Here’s a quick guide to help you understand what it is and why it matters to you.
Total Expense Ratio: Simply put, TER is the fee which asset management companies (AMCs) charge you to manage the schemes they offer. They charge this fee to meet various expenses which they incur to market, sell, and advertise the schemes. This fee also includes the agents’ commission, and other charges such as registrar and transfer fees. As per rules, mutual funds have to update their current expense ratio on their websites.
Current Regulation: The current regulation (which is expected to change in a few hours) has a slab system. The first Rs100 crore of an equity scheme’s net assets get charged at 2.5%, the next slab of Rs300 crore at 2.25%, the next Rs300 crore at 2%, and anything above Rs700 crore at 1.75%. For debt funds, the charges are 25 basis points lower at each slab. TER varies from fund to fund and depends upon the assets under management of the AMC.
So what’s the big deal: For an investor to benefit, TER should be as low as possible. For example, assume you invested Rs 100 in an MF scheme and it did not grow in a year. With a TER of 2.50 percent, your corpus will be only Rs 97.50, and if you now sell the units, you would be selling at a loss. In fact, the longer you hold your investment the greater the impact of the TER.
SEBIs board may come up with a revised TER anytime soon. Keep tracking this space for the latest updates.