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Investing In Mutual Funds Is Cheaper With TER Cut

Asset Management Companies (AMCs), who manage the mutual fund schemes, are allowed to deduct the operational expenses from the corpus.

Typically, these include investment management fees, distributor commission, registrar fees, transaction costs, sales & marketing / advertising expenses, administrative expenses, custodian fees, audit fees etc. As an investor, we need not be concerned with the break-up of these expenses. We have to simply focus on the sum total.

As per SEBI guidelines [Regulation 52(6) of SEBI (Mutual Funds) Regulations, 1996], all related expenses put together cannot exceed a certain specified percentage of the AUM (Assets Under Management). In mutual fund parlance this is known as the Total Expense Ratio or TER.

TER is deducted from the corpus and reflected in the daily NAV. Higher the TER, lower the NAV and hence lower returns for the investor. Consequently, lower TER directly reflects into higher returns for the investors.

This TER was the subject of discussion at the Board Meeting of SEBI held yesterday on Sept 18, 2018. After review, the Board has decided to bring down the TER charged by AMCs to manage and operate a mutual fund scheme.

The primary reason for this was that the total corpus managed by the Indian Mutual Fund industry has now crossed Rs.25 lakh crores. This amount was insignificant when the TERs were first introduced in 1996 and have not been changed since then.

mutual-fund-ter-cut
It's not just Happy Hours, it's Happy Days with "lower" MF expenses.

The revised Total Expense Ratio for various schemes is detailed below.

a. Equity oriented schemes
The revised maximum TER would be as under:
AUM up to Rs.500 crores - 2.25%
Rs.500-750 crores - 2.00%
Rs.750-2000 crores - 1.75%
Rs.2000-5000 crores - 1.60%
Rs.5000-10000 crores - 1.50%
Rs.10000-50000 crores - Reduction of 0.05% for every of Rs.5000 crore or part thereof
More than Rs.50,000 crores - 1.05%

Earlier, the TER was as under:
AUM up to Rs.100 crores - 2.50%
Rs.100-400 crores - 2.25%
Rs.400-700 crores - 2.00%
More than Rs.700 crores - 1.75%

b. Debt and other non-equity oriented schemes
The revised maximum TER would be as under:
AUM up to Rs.500 crores - 2.00%
Rs.500-750 crores - 1.75%
Rs.750-2000 crores - 1.50%
Rs.2000-5000 crores - 1.35%
Rs.5000-10000 crores - 1.25%
Rs.10000-50000 crores - Reduction of 0.05% for every of Rs.5000 crore or part thereof
More than Rs.50,000 crores - 0.80%

Earlier, the TER was 0.25% lower than the equity schemes, as under:
AUM up to Rs.100 crores - 2.25%
Rs.100-400 crores - 2.00%
Rs.400-700 crores - 1.75%
More than Rs.700 crores - 1.50%

c. Close Ended and Interval Schemes
Equity oriented schemes - Max 1.25% 
Other than equity oriented schemes - Max 1%.

d. Index Funds and ETFs
Maximum 1%

e. Fund of Funds (FoFs)
The TER of FoF scheme, shall be a maximum of twice the TER of the underlying funds.
- FoFs investing primarily in Liquid, Index and ETF schemes: Total TER (including the TER of underlying schemes) shall be maximum of 1%. 

- FoFs investing primarily in active underlying schemes: Total TER (including the TER of the underlying schemes), shall be maximum of 2.25% for equity oriented schemes, and maximum of 2% for other than equity oriented schemes. 

(Note: In addition to the aforesaid TERs, additional expenses of 0.30% will be permitted for penetration in B-30 cities based on the inflow from individual retail investors.)

On the face of it, this reduction may appear to be negligible. However, these are annual recurring expenses. Therefore, as time goes by and your corpus in mutual fund increases — both due to additional investment and growth — even this small reduction in cost will translate into adding lakhs of rupees to your final corpus.

So, three cheers for SEBI...

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