SEBI’s Committee on MF recommended Break Down of the Expense Ratio Bifurcation

A committee on mutual funds, constituted by SEBI in December 2011 recommended to the regulator’s board to break down the bifurcation within the fee structure known as expense ratio. According to the committee the measure will allow mutual funds to manage their expenses better and possibly improve their profits. In the absence of bifurcations within the expense ratio, fund houses will try to reduce recurring expenses which, in turn, will increase their profitability.

Currently  mutual funds are allowed to charge up to 2.25% as expense ratio. Of the 2.25% charged as expense ratio, fund houses are allowed to accept only 1.25% as asset management charges. The remaining 1% has to be mandatorily used to meet recurring expenses, which include payment of annual trail fees, auditor & registrar charges and dealing charges to empanelled brokers.

Funds with large corpuses currently charge 1.75% as expenses charges. There exists scope for these funds to charge lower expense ratios.

The SEBI panel also suggested that mutual funds, with higher assets under management, will have to bring down their expense ratio proportionately. SEBI was suggested to keep overall scheme expenses unchanged at 2.25% for schemes with assets under management not exceeding Rs 400 crore. Panel members aslo proposed an alternative slab system, which will bring down expense ratio with a proportionate increase in the asset base of the fund. There will be no change in expense ratios of debt funds.

The panel suggested SEBI to come out with wider slab limits which bring down expenses on large funds even further.

Expense ratio is more than important in debt schemes where the rate of return is not high. In the case of equity funds, the expense ratio becomes critical in times of lacklustre markets.