Ending a long wait, the Securities and Exchange Board of India (SEBI), the Indian stock market regulator, has announced a historic change in the regulations governing mutual funds. Overhauling the old rules from 1996, a series of new measures have been introduced in the interest of investors. The main objective of this change is to bring transparency to the investment process and reduce the burden of extra costs on ordinary people.
Once these new SEBI guidelines come into effect, investors will save more money, and the functioning of the funds will become clearer.
The end of the Total Expense Ratio (TER)
Until now, mutual fund companies collected various charges from investors under the name of ‘Total Expense Ratio’ (TER). This included everything from GST, brokerage, stamp duty, and management fees. As a result, an ordinary investor could not understand exactly how much money was being deducted for each category.
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SEBI has now ordered the introduction of ‘Base Expense Ratio’ (BER) to remove this opacity. Under the new rules, asset management companies (AMCs) will have to inform customers only about the basic fee or charge they charge for their services. As a result, investors will now be able to clearly know how much money the fund houses are charging as service charges.
Big discounts on fund management costs and brokerage
To increase investor returns, SEBI has reined in the maximum expense or expense ratio of various funds. The upper limit or capping on the amount of fees that fund houses used to charge earlier has been reduced. As a result, investors will directly benefit.
The list of new charges is given below:
| Type of Fund | Old Fee (Maximum) | New Fee (Maximum) |
|---|---|---|
| Index Funds and ETFs | 1.00% | 0.90% |
| Equity Fund of Funds | 2.25% | 2.10% |
| Large Funds (more than ₹500 crore) | 1.05% | 0.95% |
| Small Funds (less than ₹500 crore) | 2.25% | 2.10% |
Also, the brokerage charges that were levied while buying and selling shares were borne by the investors. SEBI has also made major cuts in those costs. In the case of cash market, brokerage has been reduced from 0.12 percent to 0.06 percent and in the case of derivatives from 0.05 percent to 0.02 percent. Due to this reduction in costs, the net NAV of the fund will increase, which will help increase the returns of the investors.
Changes in nomination and other facilities
SEBI has not only focused on costs, but has also brought several new rules for the convenience and protection of investors.
Nomination facility: Now an investor can keep a maximum of 10 people as nominees in his portfolio. Earlier, this number was much less.
Exit load: Earlier, fund houses could charge an exit load of 0.05 percent as an additional buffer fee. This additional charge has been completely abolished in the new rules.
Fund manager responsibility: According to the ‘skin in the game’ principle, from now on, a part of the salary of fund managers will have to be invested in the schemes they manage. It is expected that fund managers will be more careful and responsible in terms of investments.
These new steps by SEBI are a landmark decision for the Indian stock market and the mutual fund industry. As a result, market experts believe that this will increase the interest of the common man in investing and they will get good returns in the long run.
Disclaimer: This article is prepared for informational purposes only. Investing in mutual funds is subject to market risks. Before investing, you must read all scheme documents carefully and seek advice from a financial advisor if necessary.