From cutting total expense ratios (TER) by 15-25 basis points to linking fees with fund performance and making asset management companies (AMCs) bear New Fund Offer (NFO) costs, the regulator aims to ensure investors get fairer value. While the move is expected to improve net returns marginally, it could also reshape how AMCs price, market, and manage funds.
Mohit Gang, CEO and co-founder of Moneyfront, breaks down what these reforms mean for investors and the industry – from the real rupee impact of lower TERs to the potential risks of short-termism in performance-linked models and the challenge of expanding mutual fund penetration beyond urban India.
Here is the interview CNBC-TV18 did with Gang:
Q. How much will SEBI’s 15-25 bps expense cut help mutual fund investors?
A. A 15-25 basis point (bps) cut in fund expenses may appear small on a single fund, but it can make a noticeable difference over a long period across an entire portfolio.
For example, on an investment of ₹1 lakh earning 12% annually, investors could save around ₹1,500-₹2,500 in fees, assuming the full reduction applies and using the midpoint 20 bps (0.20%) cut for calculation.
The benefit is more meaningful for investors with larger portfolios or systematic investment plans (SIPs), though it may not be a game-changer for smaller retail investors.
Consider a lumpsum investment of ₹10 lakh for five years:
- Without the cut (2% TER → 10% net return): the corpus would be ₹17,62,341, with total fees of about ₹1,04,000.
- With the cut (1.8% TER → 10.2% net return): the corpus would be ₹17,81,628, and total fees around ₹83,000.
That’s a rupee saving of about ₹19,287, largely due to compounded gains from the 0.2% TER reduction. Over ten years, such savings could rise to roughly ₹80,000–₹1,20,000, depending on investment size and duration.
Q. Is SEBI really reducing mutual fund costs or just shifting expenses?
A. SEBI’s move is largely a redistribution of costs rather than an outright reduction, mainly involving the removal of the additional 5 basis points previously allowed.
Q. Will excluding taxes from TER make cost details clearer for investors?
A. The change makes the overall structure clearer—the total expense ratio (TER) will now cover only fund operating expenses, while GST and STT will be shown separately in statements. However, the initial transition may confuse casual investors comparing old and new reports, so fund statements will need clear labeling to avoid misunderstanding.
Q. Can performance-linked expense ratios push fund managers toward short-term gains?
A. There is a potential risk that linking fees to alpha could prompt fund managers to take on volatile short-term bets to boost performance, which may hurt long-term risk-adjusted returns. However, if benchmarks are measured over longer periods such as three to five years, the structure could better align investor and manager interests. SEBI can also reduce the risk of aggressive alpha-chasing by setting appropriate caps.
Q. Is a common formula for performance-linked TER practical across all schemes?
A. It’s feasible but challenging. A standardised, transparent formula for performance-linked TER could be based on relative outperformance versus benchmarks over rolling periods, with clear caps. However, defining “performance” consistently across equity and debt schemes would be difficult and could lead to disputes. Successful implementation would also require agreement among all asset management companies (AMCs) and regular audits to ensure transparency.
Q. Will variable expense ratios make mutual funds simpler or more confusing for investors?
A. It would bring a mix of both fairness and complexity. A variable expense ratio is fairer in rewarding strong fund performance, but it adds complexity as fees would vary in each statement. Many investors may still prefer the simplicity of flat fees unless the variable model is optional and clearly illustrated with simulations. For experienced investors, it could be beneficial, while beginners might prefer to stick with straightforward fee structures.
Q. With AMCs bearing NFO costs, will new fund launches slow down?
A. This change is likely to curb flashy marketing, leading to fewer gimmicky New Fund Offers (NFOs). Asset managers may become more selective, focusing on unique or differentiated themes. While the frequency of NFOs could decline in the short term, digital marketing tools and data-driven targeting may help keep costs manageable and sustain investor outreach over time.
Q. How much can SIP investors actually gain from lower expense ratios?
A. For a ₹5,000 monthly SIP earning 12% annually, a 15-25 basis point cut in expenses would save about ₹2,500-₹4,000 over five years and roughly ₹10,000-₹20,000 over ten years. The compounding benefit could lift the overall corpus by 1-2% over time, which is meaningful for long-term wealth building, though not a major game-changer for smaller SIP investors.
Q. Will lower commissions improve returns or push AMCs to chase higher AUM?
A. Lower expense ratios and commissions may improve investor returns marginally—by about 5-10 bps. However, asset managers are likely to focus on scaling AUM through passive or low-cost products to protect margins. Active equity funds may see slower growth, with firms prioritizing scale over alpha, though sustainable growth still depends on consistent performance.
Q. Does SEBI’s volume-based model risk more mis-selling in smaller markets?
A. Yes, a volume-driven approach could increase the risk of mis-selling, especially in Tier-2 and Tier-3 markets where investor awareness remains limited. Distributors aiming to meet sales targets may promote unsuitable schemes. While SEBI’s commission caps provide some control, stronger audits and sustained investor education are needed to prevent excessive churn and protect retail investors.
Q. Can cheaper mutual funds alone increase investor participation in India?
A. Lowering costs alone won’t drive mutual fund adoption meaningfully. AMCs need to expand access through partnerships with banks and post offices in rural areas, while leveraging UPI-linked apps to enable micro-SIPs starting as low as ₹100. Simplified onboarding, vernacular communication, and financial literacy campaigns will be key to converting first-time savers into long-term investors.