Should Ex­pense Ra­tios Come Down?

Business Today - - THE BUZZ - – Apra­jita Sharma

MAR­KETS reg­u­la­tor Sebi has sought to re­view the To­tal Ex­pense Ra­tio (TER) of mu­tual fund schemes. MFs charge up to 2.5 per cent TER on ac­tive funds. Now that in­dus­try has grown, MFs sit­ting on a big­ger pie can re­duce TER, as the cost of run­ning doesn’t grow much against ris­ing cor­pus.

Sebi’s stance has not gone down well with in­dus­try, which argues the de­ci­sion will af­fect pen­e­tra­tion and hin­der in­vestor aware­ness. Do they re­ally tell con­sumers rel­e­vant things? Few con­sumers know about the di­rect plans of MFs, which in­cur lower TER, and thus higher re­turns. For in­stance, a ` 5,000 SIP in SBI BlueChip Fund’s reg­u­lar plan, af­ter 10 years would re­turn

` 13.93 lakh at 15 per cent CAGR. It would be ` 12.11 lakh, af­ter ad­just­ing for TER of 2.3 per cent. Whereas if that amount was in­vested in its di­rect plan, with a TER of 1.18 per cent, you get ` 12.96 lakh or ` 84,826 more. If the SIP con­tin­ued for 10 more years, the dif­fer­ence would be an enor­mous ` 9.22 lakh. Most in­vestors don’t know about in­dex­hug­ging passive funds, which charge un­der 1 per cent TER.

It is time com­mis­sions are linked to fund per­for­mance. A higher TER should be charged only if fund man­agers de­liver al­pha. Sebi needs to come up with a fair fee struc­ture for re­tail in­vestors..

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