SEBI Revises Expense Ratio, Brokerage Caps For Mutual Funds

In a Wednesday board meeting, the Securities and Exchange Board of India (SEBI) approved revisions to the total expense ratio (TER) calculations for mutual funds. Simultaneously, the board also streamlined brokerage limits applicable to market transactions.

The new framework stipulates that TER will now encompass the base expense ratio, brokerage fees, regulatory levies, and statutory levies. SEBI also detailed the revised base expense ratio (BER) limits across various fund categories:

• Index Funds/ETFs:** Reduced from 1% (including levies) to 0.9% (excluding levies).
• Fund of Funds (FoFs):** For FoFs investing in liquid schemes, index funds, or ETFs, the cap decreases from 1% to 0.9%.
• Equity-Oriented Schemes:** Funds allocating 65% or more of their assets under management (AUM) to equity schemes will see the cap adjusted from 2.25% to 2.1%.
• Other FoFs:** The cap will shift from 2% to 1.85%.

SEBI also removed the additional 5 basis points (bps) that were previously chargeable to schemes with exit loads as a temporary measure.

The regulator stated that these modifications are intended to increase transparency and lower costs for investors. The expense ratio will now exclude all statutory levies, including STT, GST, and stamp duty.

Furthermore, SEBI has adjusted brokerage caps for both cash and derivative market transactions. The existing cap for cash market transactions of 12 basis points, inclusive of statutory levies, has been lowered to 6 bps, excluding levies. This represents a decrease from 8.59 bps net of levies.

These changes, initially proposed in October, aim to refine mutual fund management practices. The measures are designed to reduce brokerage costs, improve fee transparency, and simplify investor charges.

SEBI's consultation paper, which reviewed the 1996 Mutual Fund Regulations, outlined plans to tighten cost structures for asset management companies (AMCs) to ensure that benefits are passed on to investors.