Should Expense Ratios Come Down?

Markets regulator Sebi has sought to review the Total Expense Ratio (TER) of mutual fund schemes. MFs charge up to 2.5 per cent TER on active funds.

By Aprajita Sharma  
Monday, September 3, 2018

Markets regulator Sebi has sought to review the Total Expense Ratio (TER) of mutual fund schemes. MFs charge up to 2.5 per cent TER on active funds. Now that industry has grown, MFs sitting on a bigger pie can reduce TER, as the cost of running doesn't grow much against rising corpus.

Sebi's stance has not gone down well with industry, which argues the decision will affect penetration and hinder investor awareness. Do they really tell consumers relevant things? Few consumers know about the direct plans of MFs, which incur lower TER, and thus higher returns. For instance, a Rs5,000 SIP in SBI BlueChip Fund's regular plan, after 10 years would return Rs13.93 lakh at 15 per cent CAGR. It would be Rs12.11 lakh, after adjusting for TER of 2.3 per cent. Whereas if that amount was invested in its direct plan, with a TER of 1.18 per cent, you get Rs12.96 lakh or Rs84,826 more. If the SIP continued for 10 more years, the difference would be an enormous Rs9.22 lakh. Most investors don't know about index-hugging passive funds, which charge under 1 per cent TER.

It is time commissions are linked to fund performance. A higher TER should be charged only if fund managers deliver alpha. Sebi needs to come up with a fair fee structure for retail investors..

Aprajita Sharma

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