An analysis of the latest TER structure published on AMCs website shows that TER of all regular plans have come down drastically. In fact, in a few instances, the cost of the regular plan of a fund has come down to 0.30% largely because of reduced GST component.
We spoke to a few operational experts and fund officials to understand the reason for this.
Jimmy Patel, CEO, Quantum Mutual Fund pointed out that SEBI has asked fund houses to manage the fund expenses from the scheme itself. “Simply put, fund houses cannot spill over the cost from their AMC book. Also, there will be no fungibility as fund houses will have to disclose break up of their expenses such as management fee and other expenses separately.”
Swarup Mohanty, CEO, Mirae Asset believes that the reduction in GST component is due to introduction of break ups. “Earlier, fund houses were allowed to do fungibility i.e. disclosing the base TER without giving segregation of various expenses. Now, with this going away, fund houses can charge GST component in management fees only instead of the entire cost.”
Giving an example, a senior operation officer of a large fund house said if a scheme had an expense ratio of 2.50%, the scheme used to charge GST on 2% (excluding distribution expenses of 0.5%) irrespective of actual management fees. However, now fund houses can charge GST only on fund management fees i.e. if management fees is 1.5% then the GST will be charged on 1.5% instead of 2% earlier.
This has come in the wake of SEBI circular in which the market regulator has asked fund houses to disclose investment and advisory fees and other expenses along with the gross commission of distributors with immediate effect. With this, the half-yearly consolidated account statement (CAS) will now have two more columns or break up for the disclosure of management fees and other expenses along with the gross commission paid to distributors.
In the circular, SEBI said, “The scheme’s average total expense ratio (in percentage terms) along with the break up between investment and advisory fees, commission paid to the distributor and other expenses for the period for each scheme’s applicable plan (regular or direct or both) where the concerned investor has actually invested in.”
