India, SEBI just made it a lot cheaper for you to invest in mutual funds


  • As Indian households embrace financial diversification and mutual funds become more popular, the cost per investor for fund managers is declining.
  • As a result, the SEBI has decided to restrict the total expense ratio (TER) for mutual fund schemes as a percentage of assets.
  • The SEBI has also prohibited mutual fund promoters from paying upfront commissions to brokers, saying that they should follow a trail-commission approach instead.
The board members of the Securities and Exchange Board of India (SEBI), the country’s securities regulator, know a thing or two about economies of scale. As Indian households embrace financial diversification and mutual funds become more popular, the cost per investor for fund managers should go down.

Keeping this in mind, the SEBI has decided to restrict the total expense ratio (TER) for mutual fund schemes as a percentage of assets.

For equity-oriented mutual fund schemes, the most prominent kind of scheme, the TER will be capped at 1.25% for closed-ended schemes and a maximum of 2.25% for open-ended schemes less than ₹5 billion - with a gradual reduction to 1.05% for schemes above ₹500 billion. The TER for index-tracking funds, a passive investment option, will be limited to 1% while the cap for fund of funds will be 2.25%.

The SEBI has also prohibited mutual fund promoters from paying upfront commissions to brokers. This means that they can’t make direct payments to brokers from their books. Instead, they will have to pay distributors on a trail-commission basis, which is contingent on how long investors stick with a specific mutual fund scheme.

The changes are expected to impact the overall revenues of the mutual fund management industry by ₹15 billion. However, demand for mutual fund schemes is likely to increase significantly.

The rules come as the industry reached a record ₹25.2 trillion of assets under management at the end of August 2018. This marks a four-fold increase from August 2008.

Besides making mutual fund investments cheaper, the SEBI also reduced the period for listing shares following an IPO from six days to three and decided to open up the commodity derivatives market to foreign portfolio investors.
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