Will new sebi rules reduce TER only for regular plans or for direct plans as well?

Since sebi has capped the TER based on fund size, will this reduce expense ratio’s of direct funds as well? And when will the new TER’s come into effect? @Bhuvan

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Thanks for asking this question. Even I want to know.

Before I answer your question, let me set the context because Indian Investors have an annoying habit of not bothering about costs. Like you’ve correctly stated, SEBI yesterday capped the expense ratios and revised the slabs based on AUM, which was in a way long overdue.

The new TER for open ended schemes

AUM Slab (INR crore) TER - equity oriented schemes TER for debt & other schemes
0 - 500 2.25% 2.00%
500-700 2% 1.75%
750-2000 1.75% 1.50%
2000-5000 1.60% 1.35%
5000-10000 1.50% 1.25%
10000-50,000 TER reduction of 0.05% for every increase of 5,000 crore AUM or part thereof TER reduction of 0.05% for every increase of 5,000 crore AUM or part thereo
>50,000 1.05% 0.80%

Old structure

AUM Slab (INR crore) TER - equity oriented schemes TER for debt & other schemes
Up to Rs.100 crore 2.50% 2.25%
Next Rs.300 crore i.e. up to Rs.400 crore 2.25% 2%
Next Rs.300 crore or up to Rs.700 crore 2% 1.75%
Above Rs.700 crore 1.75% 1.50%

Now, as you can see there is a reduction across the board. This reduction in TER results in a limited impact on debt fund expenses. That’s because most of the debt already have expense ratios within the permissible limits.

Second observation is that the reduction is steeper as the fund size gets larger, which is in tune with the benefits of economies of scale. The SEBI chairman at the recent AMFI summit had expressed concern about the concentration of assets among the top AMCs. The top 7 AMC control about 70% of the assets.

Now to your question about the impact on direct mutual fund expense ratios.

Logic dictates that the ratios should reduce. At the very least, now that upfront commissions have been totally banned, the difference should ideally reflect in the form of a reduction in the TER. But I have my doubts on this and it would be wise to wait for more details from SEBI and the fund houses before jumping to any conclusions. Indian AMCs have a notorious penchant for creative accounting.

The decision has been announced but the fine print has to be drafted. Over the coming few weeks we should see more details on this.

To add more global context, how competitive are Indian costs?

Recently there was a bit of a back and forth between Morningstar and Foundation of Independent Financial Advisors (FIFA) over this. In the 2017 Morningstar in its 2017 Global Fund Investor Experience Study had stated that India has one of the highest asset-weighted expense ratios out of the 25 countries covered in its study. FIFA India came up with its own study which said that India has one of the lowest asset-weighted expense ratios.

The reports are pretty data rich for me summarize in the context of this question but you can read the full reports here. They make for interesting reading.

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Did you notice, few days back, HDFC AMC increased TER by 0.05% across the funds w.e.f 10th Sept.

When I noticed this, I checked my inbox for all past TER changes emails for HDFC AMC and found earlier they were +/- 0.01% range in general. But this time it is 0.05% suddenly, flat across the funds regardless of AUM.

Now, yesterday’s SEBI notification in the change of TER resulted in fall of share price of HDFC and Reliance AMC today.

With the new guideline,
AUM 10000-50,000 Cr - TER reduction of 0.05% for every increase of 5,000 crore AUM or part thereof

I am wondering if all these actions and reactions are connected in some sort?

On a contrary, some time back, my HDFC Securities RM told me that soon the TER gap between direct and regular plan would narrow down significantly. As per him, the TER of direct and regular won’t vary much.

Let’s see how it unfolds from here.

Haha, I do agree that we may see some creative accounting by the AMC’s. Thank you for the detailed answer.

Here’s the official Gazette Notification.

They shall come into force on the 1st day of April 2019.

Most of the AMCs have already made the changes, but maybe some were waiting in the wings.