Change in Total Expense Ratio (TER) of Mutual Funds | Everything you need to know | ETMONEY
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Mutual fund companies change the
Mutual fund companies change the scheme total expense ratio or TER from time to time.
In this video,Shankar Nath explains the total expense ratio in mutual funds and presents some reasons and observations on why AMCs change the TER so frequently.
Topics covered in the videos:
00:00 INTRODUCTION
00:46 WHY MUTUAL FUNDS CHANGE THEIR TOTAL EXPENSE RATIO OFTEN?
02:06 WHY A CHANGE IN TER?
05:39 EXPENSE RATIOS AND INDEX FUNDS
09:04 ETMONEY OPINION
The SEBI guidelines clearly define the maximum expense ratio that can be charged to a scheme. The maximum expense ratio limit keeps coming down as the size of the portfolio increases. So while the highest limit allowed for an equity scheme is 2.25% for a small AUM fund for equity schemes with an AUM of 50,000 crore or more the highest they can go is 1.05%
This SEBI change has most definitely benefited Indian investors who now pay a lot less expense ratio than earlier.
👉WHY A CHANGE IN TER?
The first reason why mutual funds change their total expense ratio relates to changes in the AUM or assets under management. In the previous section of this video, we understood the importance of AUM to the calculation of the total expense ratio.This movement of AUM happens every day .. however since changing the expense ratio on a daily basis is highly impractical most AMCs change TERs on a monthly or quarterly basis
A second reason for these ever changing TERs is to do with the rising competition amongst AMCs for the investor’s money. Additionally there is a big expectation factor .. and consumers often move from one scheme to another if the performance does not keep pace
We know by now that returns and expenses are largely part of the same equation .. which means fund houses have to be careful on how they price their schemes. A high expense ratio might mean lower growth in AUM or even negative AUM as compared to others .. and AMC are likely to factor this in their calculations and strategis
A related technique used often by fund houses is to keep a low TER when the scheme is new so that more investors are attracted to that scheme. and once the AUM has grown enough they then push up the TER to compensate for the initial lower expense ratio.
Now investors don’t like this we don’t like this but mutual fund companies justify sudden expense ratio hikes under the pretext that the TER falls within the SEBI prescribed limit. So this is certainly a growing issue and hopefully the SEBI will look at it in the future.
This might be a tad difficult in mutual funds with thousands of schemes .. but yes, an acceptable approach would be needed. If you can think of an approach that keeps the investors and the mutual fund company’s interests in mind then do let us know in the comments section below.
👉EXPENSE RATIOS AND INDEX FUNDS
In the first week of April, many HDFC and UTI mutual fund investors received a note that these AMCs would be hiking the TER in some specific index funds.While a change in TER is pretty common for an actively managed fund investors tend to be more sensitive to TER change in an index fund
Possible explanation of the hike in TER of index fund could be as follows:
The simplified cost of running a Nifty 50 index scheme is anywhere from 8 to 12 basis points .. that’s 0.08% to 0.12%. So there are RT&A costs, custodian expenses, trading fees, GST etc. that are attributable to an index fund.Plus when we apply that additional 2 basis points that has to be kept aside for investor awareness programs that previous 0.1% TER starts looking like a steal.And while it might be a steal for the investor but for the AMC, it smells more like a loss
The other theory we had and this too is related to the economics of running a fund is the change in accountability for both these asset management companies. Afterall unlike a lot of other AMCs HDFC and UTI are listed on the Indian stock exchange which might not allow them their previous flexibility of cross-subsidizing one fund with another
👉ETMONEY OPINION
Investors understand the services and value-add provided by an asset management company and why an expense ratio is needed to be paid.
In our view, what irks most investors is where the TER is decreased with the sole purpose of increasing AUM and is then increased at a time when the investor can’t redeem their units without incurring exit loads and capital gain taxes. And unless AMCs become morally self-regulating we think there is a case for SEBI to step in with solutions which are acceptable to both parties.
#ETMONEY #TotalExpenseRatio #mutualfunds #learnwithETMONEY
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In this video,Shankar Nath explains the total expense ratio in mutual funds and presents some reasons and observations on why AMCs change the TER so frequently.
Topics covered in the videos:
00:00 INTRODUCTION
00:46 WHY MUTUAL FUNDS CHANGE THEIR TOTAL EXPENSE RATIO OFTEN?
02:06 WHY A CHANGE IN TER?
05:39 EXPENSE RATIOS AND INDEX FUNDS
09:04 ETMONEY OPINION
The SEBI guidelines clearly define the maximum expense ratio that can be charged to a scheme. The maximum expense ratio limit keeps coming down as the size of the portfolio increases. So while the highest limit allowed for an equity scheme is 2.25% for a small AUM fund for equity schemes with an AUM of 50,000 crore or more the highest they can go is 1.05%
This SEBI change has most definitely benefited Indian investors who now pay a lot less expense ratio than earlier.
👉WHY A CHANGE IN TER?
The first reason why mutual funds change their total expense ratio relates to changes in the AUM or assets under management. In the previous section of this video, we understood the importance of AUM to the calculation of the total expense ratio.This movement of AUM happens every day .. however since changing the expense ratio on a daily basis is highly impractical most AMCs change TERs on a monthly or quarterly basis
A second reason for these ever changing TERs is to do with the rising competition amongst AMCs for the investor’s money. Additionally there is a big expectation factor .. and consumers often move from one scheme to another if the performance does not keep pace
We know by now that returns and expenses are largely part of the same equation .. which means fund houses have to be careful on how they price their schemes. A high expense ratio might mean lower growth in AUM or even negative AUM as compared to others .. and AMC are likely to factor this in their calculations and strategis
A related technique used often by fund houses is to keep a low TER when the scheme is new so that more investors are attracted to that scheme. and once the AUM has grown enough they then push up the TER to compensate for the initial lower expense ratio.
Now investors don’t like this we don’t like this but mutual fund companies justify sudden expense ratio hikes under the pretext that the TER falls within the SEBI prescribed limit. So this is certainly a growing issue and hopefully the SEBI will look at it in the future.
This might be a tad difficult in mutual funds with thousands of schemes .. but yes, an acceptable approach would be needed. If you can think of an approach that keeps the investors and the mutual fund company’s interests in mind then do let us know in the comments section below.
👉EXPENSE RATIOS AND INDEX FUNDS
In the first week of April, many HDFC and UTI mutual fund investors received a note that these AMCs would be hiking the TER in some specific index funds.While a change in TER is pretty common for an actively managed fund investors tend to be more sensitive to TER change in an index fund
Possible explanation of the hike in TER of index fund could be as follows:
The simplified cost of running a Nifty 50 index scheme is anywhere from 8 to 12 basis points .. that’s 0.08% to 0.12%. So there are RT&A costs, custodian expenses, trading fees, GST etc. that are attributable to an index fund.Plus when we apply that additional 2 basis points that has to be kept aside for investor awareness programs that previous 0.1% TER starts looking like a steal.And while it might be a steal for the investor but for the AMC, it smells more like a loss
The other theory we had and this too is related to the economics of running a fund is the change in accountability for both these asset management companies. Afterall unlike a lot of other AMCs HDFC and UTI are listed on the Indian stock exchange which might not allow them their previous flexibility of cross-subsidizing one fund with another
👉ETMONEY OPINION
Investors understand the services and value-add provided by an asset management company and why an expense ratio is needed to be paid.
In our view, what irks most investors is where the TER is decreased with the sole purpose of increasing AUM and is then increased at a time when the investor can’t redeem their units without incurring exit loads and capital gain taxes. And unless AMCs become morally self-regulating we think there is a case for SEBI to step in with solutions which are acceptable to both parties.
#ETMONEY #TotalExpenseRatio #mutualfunds #learnwithETMONEY
👉 To invest in Direct Plans of top Mutual Funds for free, download the ETMONEY app: https://etmoney.onelink.me/unJQ/5ca1a...
👉Read more such informative articles at https://www.etmoney.com/blog
👉 Follow us on:
► Facebook: Facebook: ETMONEY
► Twitter: Twitter: etmoney
► Instagram: Instagram: etmoney_official
► LinkedIn: LinkedIn: et_money
3 سال پیش
در تاریخ 1400/03/02 منتشر شده
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