Mutual funds cannot charge expenses in lieu of exit load: Sebi

Sebi’s new rules would help bring down the overall expenses charged to mutual fund investors. Photo: Aniruddha Chowdhury/Mint

The Securities and Exchange Board of India (Sebi), in two circulars issued on Friday, said that expenses in lieu of exit load will not be allowed for close-ended schemes and incentives allowed for beyond the top 15 cities or B-15 cities would now be expanded to B-30 cities to increase penetration in smaller towns.

This would help bring down the overall expenses charged to mutual fund investors. Mint had reported on 12 January that Sebi would be directing fund houses to reduce their expense structure. (http://bit.ly/2DmImQ9)

Currently, fund houses can charge a maximum of 2.5% of assets under management (AUM) for managing an equity scheme. On top of this, 20 basis points (of AUM) can be charged in lieu of an exit fee, and another 30 basis points for promoting mutual fund penetration in small towns. This takes the total charges to a maximum of 3%. One basis point is one-hundredth of a percentage point.

India’s average equity expense ratio or Total Expense Ratio (TER) of 2.22% is among the highest in the world, said an October study by mutual fund tracker Morningstar Inc.

“It is clarified that mutual fund schemes including close-ended schemes, wherein exit load is not levied/not applicable, the AMCs shall not be eligible to charge the 20 basis points,” said Sebi in the circular.

The additional expenses allowed for penetration in tier-2 cities was introduced in 2012.

“Since more than five years have elapsed and on review, it is now decided that the additional TER of up to 30 basis points would be allowed for inflows from beyond top 30 cities instead of beyond top 15 cities,” the circular said.

This means that asset management companies (AMCs) will be able to charge the additional 30 basis points if 30% of the gross new inflow in a scheme or 15% of the total AUM of a scheme come from beyond the top 30 cities.