Source: Mint
Context:
The Securities and Exchange Board of India (Sebi) plans to meet top executives of asset management companies (AMCs) to discuss a proposal to cap broker fees for executing trades by mutual funds. This is part of Sebi’s broader initiative to overhaul mutual fund costs charged to investors, known as the Total Expense Ratio (TER).
Proposed Cap on Broker Fees
- Sebi proposed reducing brokerage paid by mutual funds:
- Cash market: 12 bps → 2 bps
- Derivatives: 5 bps → 1 bps
- Objective: Avoid investors paying twice for research — once via brokerages, again through AMC research.
- Sell-side brokers have pushed back, suggesting a relaxed cap of 6–7 bps due to the importance of their research.
Total Expense Ratio (TER) Overhaul
- TER includes management fees, distributor commissions, brokerage and transaction costs, custodian/RTA fees, statutory levies, and other expenses.
- Sebi plans to unbundle TER for transparency, excluding statutory levies like STT and stamp duty.
- Current TER for equity schemes:
- 2.25% for ₹500 crore AUM
- 1.05% minimum for ₹50,000 crore AUM
- TER directly impacts investor returns; higher TER reduces net gains over time.
Total Expense Ratio (TER)
The Total Expense Ratio (TER) is the annual fee charged by a mutual fund to manage and operate its scheme. It is expressed as a percentage of the fund’s average assets under management (AUM) and includes all costs related to fund management.
Components of TER
TER generally includes:
- Management Fees: Payment to the fund manager for managing the portfolio.
- Administrative Expenses: Costs of fund operations, accounting, and reporting.
- Marketing and Distribution Expenses (if applicable): Includes brokerage and commission paid to distributors.
- Custodian and Registrar Fees: Payment to entities maintaining fund assets and records.
- Other Operational Costs: Legal, audit, and regulatory compliance costs.
TER does not include brokerage or transaction costs for buying and selling securities, which are accounted for separately in fund disclosures.
