The following recurring expenses can be charged to the fund:
# Investment and advisory fees, which has to be fully disclosed in the Offer Document (i.e. management fees that the AMC charges the scheme);
# Marketing and selling expenses, including agents’ commission (distributor commission is not chargeable on ‘direct plans’ i.e. plans where investor has not availed of the services of a distributor);
# Brokerage and transaction cost;
# Fees and expenses of trustees;
# Registrar’s charges for transfer of units sold or redeemed;
# Audit fees;
# Custodian fees;
# Expenses on investor communication, account statements, dividend / redemption cheques and warrants;
# Expenses on fund transfers;
# Insurance premium paid by the fund;
# Winding up costs for terminating a fund or a scheme;
# Costs of statutory advertisements;
# In case of a gold exchange traded fund scheme, recurring expenses incurred towards storage and handling of gold;
# In case of a capital protection oriented scheme, rating fees;
# In case of a real estate mutual fund scheme, insurance premia and costs of maintenance of the real estate assets (excluding costs of development of such assets);
# Listing fees, in case of schemes listed on a recognised stock exchange; and
# Such other costs as may be approved by SEBI.
Expenses charged to a scheme on this basis, divided by its net assets gives the base Total Expense Ratio (TER) of the scheme.
Expenses other than the above cannot be charged to the scheme. For example, the following expenses, if incurred, will have to be borne by the AMC or trustee or sponsors, but cannot be charged to the scheme:
# Penalties and fines for infraction of laws;
# Interest on delayed payment to the unit holders;
# Legal, marketing, publication and other general expenses not attributable to any scheme(s);
- Expenses on investment management / general management (as distinct from “investment and advisory fees” which is a permitted expense, as mentioned earlier);
- Expenses on general administration, corporate advertising and infrastructure costs; and
- Depreciation on fixed assets and software development expenses.
The regulations prescribe the following limit on base TER (excluding the issue expenses and redemption expenses, but including management fees):
|Daily Average Net Assets||Equity Scheme||Debt Scheme|
|First Rs. 100 crore||2.50%||2.25%|
|Next Rs. 300 crore||2.25%||2.00%|
|Next Rs. 300 crore||2.00%||1.75%|
|Excess over Rs. 700 crore||1.75%||1.50%|
For balanced schemes, the limit would depend on whether the scheme is predominantly invested in equity or debt. Accordingly, either the equity scheme limit or the debt scheme limit would apply.
Fund of funds scheme has a total expense limit of 2.50 % of daily average net assets, including the weighted average of charges levied by the underlying schemes.
In the case of index funds and exchange traded funds, the total expense ratio cannot be more than 1.50 % of average net assets.
The base TER limits applicable to equity schemes are applicable to Gold ETF scheme(s).
It may be noted that brokerage and transaction charges on purchases and sales of securities (part of scheme’s investment portfolio) are capitalised. This means that if securities are bought at Rs. 100 and brokerage and transaction charges are 10 paise, the purchase cost will be taken as Rs. 100 plus 10 paise i.e. Rs. 100.10. In the case of a sale, the sale realisation would have been taken as Rs. 100 minus 10 paise i.e. Rs. 99.90. Such capitalisation is however restricted to 12 paise for cash market transactions, and 5 paise for derivatives transaction. Thus, brokerage and transaction charges upto these limits of 12 paise and 5 paise do not get accounted as recurring expense.
The following three additional heads of expense are permitted to be charged beyond the base TER:
>> Goods and Service Tax (GST) on investment and advisory fees charged to the scheme. This is permitted beyond the base TER limit.
>> Expenses on mobilisation from B30 cities
The top 30 cities from which mutual funds in India mobilise money are called T30 cities. AMFI publishes this list. Other cities are called B30 cities. If the new inflows from B30 cities are at least (a) 30% of gross new inflows in the scheme or (b) 15% of the average assets under management (year to date) of the scheme, whichever is higher, funds can charge additional expense (i.e. beyond the base TER) of up to 30 basis points on daily net assets of the scheme.
In case inflows from B30 cities is less than the higher of (a) or (b) above, additional total expense on daily net assets of the scheme can be charged on pro rata basis as follows:
Daily net assets x 30 basis points x New inflows from B30 cities
365 x Higher of (a) or (b) above
* 366, where applicable
However, this additional expense that is charged beyond the base TER on account of inflows from B30 cities, needs to be clawed back in case such investment is redeemed within a period of 1 year from the date of investment.
Further, the additional expense charged must be utilised only for distribution expenses incurred for bringing inflows from such cities.
Additional levy in lieu of exit load
As will be discussed in the next section, exit load charged by schemes need to be written back to the scheme. In lieu of this, schemes are allowed to charge 0.05% beyond the base TER.
Thus, TER has two components — Base TER, and additional TER. GST on management fees, Expenses for mobilisation from B30 cities and Additional levy in lieu of exit load can be charged beyond the base TER limit. Other recurring expenses listed above have to be accommodated within the base TER limit.
Any expense in excess of the above limits would need to be borne by the AMC, trustees or sponsors. A few AMCs do pay high upfront commissions in the range of 6-8% to distributors for their closed-end schemes, hoping to recoup the losses through management fees during the life of the fund.
Noting the risk of mis-selling of mutual fund schemes to investors, arising out of such high upfront commissions, AMFI has set a ceiling of 1 % that AMCs can pay distributors as upfront commission. However, unlike a SEBI directive that has to be complied it, AMFI directives are recommendatory. AMFI has limited powers to enforce such directives.
Mutual funds need to disclose in their website, in downloadable spreadsheet format, the TER of all their schemes on a daily basis.