Source: Mint
Context:
SEBI recently proposed a major overhaul of mutual fund regulations, including a sharp reduction in brokerage and transaction cost limits that AMCs can charge over and above the Total Expense Ratio (TER). This created industry-wide concerns about margins, research costs, and market competitiveness.
Key Proposal by SEBI
- Brokerage Cap Cuts
- Cash Market: From 0.12% (12 bps) → 0.02% (2 bps)
- Derivatives: From 0.05% → 0.01%
- Objective:
- Prevent excessive trading costs being passed on to investors.
- Stop duplication of research costs embedded in brokerage fees.
What is TER?
Total Expense Ratio (TER) is the annual fee charged by a mutual fund to manage and operate the scheme. It represents all costs borne by investors, expressed as a percentage of the fund’s average assets under management (AUM).
Concerns Raised by Asset Management Companies
- Margin Compression
- AMCs may have to bear their own research costs rather than passing them to investors.
- Expected revenue impact: 1–8% of core revenues (JM Financial report).
- Research Access Risk for Smaller AMCs
- Many small fund houses lack internal research teams.
- They may struggle to buy external research under the new limits.
- Trading Competitiveness
- AMCs fear losing block deals if brokers prefer clients paying higher commissions.
- Operational Implications
- Sell-side brokers may lose revenue from bundled research + execution services.
- SEBI asked AMCs (via AMFI) for granular data on turnover and actual brokerage cost impact.
Other Issues Discussed
- Relaxation of norms for Specialized Investment Fund (SIF) distributor exams.
- TER reduction concerns were mentioned but not substantively discussed.
