The Securities and Exchange board of India (SEBI) has recently released a set of groundbreaking proposals aimed at revolutionizing the mutual fund industry. These proposals have the potential to reshape the landscape of the industry and improve investor outcomes. Let’s delve into the key points of these proposals and their potential impact.
- Inclusion of Brokerage and Transactions Costs in TER:
SEBI suggests incorporating brokerage and transaction costs including Securities Transaction Tax (STT), within the Total Expense Ratio (TER). This move aims to enhance transparency and provide investors with a more accurate representation of the actual costs associated with the Investments.
- Allowing AMCs to Become Members of Stock Exchanges
Under the new proposals, asset Management companies would be permitted to become members of stock exchanges in order to allow them to act as their own brokers. This change could streamline operations, reduce costs and potentially lead to better execution of trades.
- Allocation of Additional TER for Flows from B-30 Cities:
SEBI proposes Additional TER for flows from B-30 cities (0.3%) should come from investor education budget (0.01%)
- Abolishing Additional TER for Exit Load Claw backs:
SEBI proposes the allocation of an additional TER of 0.05% that is currently charged in lieu of claw back exit loads. This change aims to simplify fee charge structures and make them more investor-friendly.
- Inclusion of GST in TER:
SEBI recommends including Goods and Services Tax (GST) in the TER calculation, providing investors with a comprehensive view of the costs associated with their investments.
- Transition for Scheme Level TER to Asset Level TER:
Under the new proposals, the TER structure would shift from scheme level to asset level. For equity funds, the TER would be capped at 2.55%, while non-equity funds would have a cap of 1.20%. This represents a significant reduction in TER for non-equity funds.
- Termination of High TER on FoF(Overseas)
SEBI suggests that the TER for fund of funds (FoF) investing in overseas schemes should be limited to twice the underlying scheme’s TER plus an additional 0.5%. This change aims to address excessive costs associated with investing in overseas funds. At the moment, debt is 2% and equity is 2.25%. The non-equity TER reduction is enormous!
- Lowering of Maximum Exit Load:
The maximum exit load, which is currently set at 5% would be reduced to 2%. This move would provide investors with more flexibility when redeeming their investments.
- Distributors Incentives for Onboarding Women Investors:
SEBI proposes providing distributor incentives for on boarding women investors with the funds for this incentive sourced from the investor education budget (0.01% of assets). This initiative aims to promote gender inclusivity and encourage more women to participate in the mutual fund market.
- Differential TER for Lock-in or Semi-lock-in Schemes
Under the proposals, the TER for Lock-in schemes, such as Equity Linked Savings Scheme (ELSS) or Target Maturity Funds, would be increased only for new investors while encouraging new inflows into such schemes.
- Imposing Charges for Switching from Low-Cost to High-Cost MF Scheme
If a distributor switches an investor from a low-cost mutual fund scheme to a higher-cost scheme, the commission of the low-cost scheme will be charged. This provision aims to discourage distributors from making unnecessary switches that may not be in the best interest of investors.
- Introducing Performance Fees
SEBI proposes allowing performance fees to be charged if certain conditions, such as outperformance against benchmarks are met. This would be introduced through a regulatory sandbox, while management fees would be kept at index fund levels. This change aims to align fund manager’s interest with investor outcomes.
The proposals put forth by SEBI for the mutual fund industry are ambitious and far-reaching; if implemented effectively, these changes have the potential to enhance transparency, reduce costs, and improve investor outcomes. However, it is crucial to thoroughly dissect and analyze each proposal to fully understand their implications and address any potential challenges or concerns.