SEBI proposes uniform total expense ratio for mutual funds

May 19, 2023

Capital markets regulator Sebi on Thursday proposed a uniform total expense ratio (TER) across mutual fund schemes in a bid to bring in transparency in the costs charged to unitholders.

At present, Sebi allows asset management companies to charge unitholders of mutual fund four additional type 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, good and services taxes and addition expense 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.

“TER reflects the maximum expense ratio that an investor may have to pay and hence it should be inclusive of all the expenses permitted to be charged to an investor and the investor should not be charged any amount over and above the prescribed TER limits,” Sebi said in its consultation paper.

Noting the underlying principle that TER should be inclusive of all costs charged to an investor, Sebi proposed that brokerage and transaction expenses may be included within the TER limit. Besides, all expenses and costs of investment including STT (Securities Transaction Tax) should be within the TER limit.

Also, Sebi suggested that additional commission to distributors may continue for inflows from B30 cities. The distributors may be paid only for investment from new individual investors (new PAN) from B-30 cities at the industry level.