Rationalising TER Once Again

Recently, market regulator Securities and Exchange Board of India (SEBI) proposed a number of changes to the way mutual funds charge expenses to investors. The new slabs would reduce the total expense ratio (TER) of mutual funds for equity, hybrid and solution-oriented schemes. These proposed changes are based on various factors. For example, the Indian mutual fund industry has grown from Rs 6 lakh crore in March 2012 to more than Rs 40 lakh crore in May 2023. The number of investors has also gone up from 1.2 crore in March 2012 to 3.5 crore in March 2023. 

However, the average expense ratio for retail investors has only gone down from 2.2 per cent in March 2012 to 2.0 per cent in March 2023. The regulator in its research found that pre-tax profits of asset management companies (AMCs) grew 154 per cent from 2016-17 to 2021-22. In this period, their profit margins too grew steadily from 43 per cent to 70 per cent. Despite such increase in profit and profit margin, the expenses ratio was kept at an elevated level. There are examples worldwide where such benefit of economies of scale is passed back to customers, which keeps the overall expense ratio quite low. For instance, The Vanguard Group, with about USD 7.7 trillion in global assets under management as of April 2023, considers its investor as shareholders.

As each fund passes its fiscal year-end, the annual expense ratio is calculated by dividing the fund’s operational expenses by its average net assets. If the fund’s assets are increasing faster than its costs, you will enjoy lower expenses as a fund shareholder. This might be an exceptional case but the proposed changes by SEBI are in investors’ interest as they would lower the cost of investing in mutual funds. This would enable investors to earn higher returns on their investments and is likely to increase the entire market size, which will be a win-win situation for both AMCs as well as customers.

Shashikant Singh
Executive Editor