MUMBAI: The Securities and Exchange Board of India (Sebi) is considering changes to the way mutual funds charge investors for their total expense ratio, the Economic Times reported on Tuesday quoting two individuals familiar with the matter. The proposed changes seek to clamp down on mis-selling and may require mutual funds to impose a uniform expense ratio across scheme categories, such as equity or debt. This means that a fund house must charge the same expense ratio for all equity funds, regardless of the scheme's size or type. Currently, mutual funds have the flexibility to set their fees according to the scheme.
Sebi is proposing the change after discovering that many equity New Fund Offerings (NFOs) in recent years have attracted funds from existing schemes. The regulator suspects that brokers and distributors pushed clients to shift money from existing investments to new schemes to earn higher commissions.
The proposal aims to prevent distributors from recommending that clients shift money to new schemes, which may be more expensive, just for higher commissions. The move is expected to minimize mis-selling and provide uniformity in charges. Over 20% of the industry's assets under management moved to the costlier equity NFOs last year, according to industry estimates.
Currently, mutual funds' expense ratios, including management fees, marketing fees, and distributor commissions, vary by product and scheme type. Within equities, the ratio differs for large-cap, flexi-cap, and mid-cap, among other categories. The fee also depends on the fund's size and type.
Sebi has been discussing changes to the expense ratio since December 2022 when it initiated a study of fees and expenses charged by mutual funds. The regulator believes that there is further scope to reduce the total expense ratio of mutual funds, making them more affordable for investors.
The maximum total expense ratio chargeable by an equity scheme is 2.25%, according to Sebi's framework. The regulator has changed the expense ratio framework in September 2018, and since then, the mutual fund industry's assets under management have risen by almost 65%.
