In a bid to rationalize costs, SEBI has barred new ELSS schemes from charging an additional 20bps TER.
Thus, the three recently launched ELSS – Mirae Asset Tax Saver Fund, DHLF Tax Savings Fund and Peerless Long Term Advantage Fund are not charging this 20bps extra TER.
SEBI had allowed fund houses to charge an additional TER to the extent of 20 bps with effect from October 2012 in lieu of exit loads. Also, the market regulator had mandated that the entire exit load should be credited back to the schemes.
Typically, ELSS schemes have a lock in period of three years and have no exit load period. ELSS category manages Rs. 40,313 crore as on October 2015. A rough calculation shows that the industry is charging close to Rs. 81 crore in lieu of exit loads in ELSS.
The marketing head of a fund house which recently launched an ELSS said “The regulator gave us an option to introduce exit load period in ELSS to charge the 20bps additional TER. If we introduce 7 days exit load period after the lock in of three years, we will be eligible for the additional TER. However, we have chosen not to do this.”
Most closed end schemes are charging an additional 20bps. In fact, a few no-load schemes are also charging this additional expense from investors, point out distributors.
Following the restriction on charging this 20bps in new ELSS schemes, new fund houses feel that this will put them in a disadvantageous position. “We don’t have too many schemes and we have to compete with the existing funds having a track record of performance, dividend payment etc. Distributors spend a lot of time and effort to acquire clients and they deserve to be adequately compensated for this. However, if my TER is low how can I compensate distributors and compete with the existing funds?”
Meanwhile, IFAs are demanding that all closed end schemes and schemes with no exit loads should be barred from charging extra TER. “Almost all existing ELSS schemes and close end schemes charge this additional TER despite the fact that these schemes don’t have exit load periods. SEBI should look at these schemes to make mutual funds more cost effective for investors,” said a Mumbai based IFA.
SEBI has recently constituted a committee headed by Nandan Nilekani, former chairman of UIDAI to suggest measures to reduce cost structure in mutual funds. Last week, SEBI Chief UK Sinha has said at a public forum that the committee has already submitted its report and SEBI is likely to come out with guidelines that will reduce cost of mutual funds.
