HDFC AMC among other AMC stocks in focus after Sebi’s mutual fund expense ratio rule changes

Stocks of asset management companies (AMCs) like HDFC AMC, Nippon Life Insurance, Aditya AMC, among others are likely to be in focus on Thursday, December 18, after the Securities and Exchange Board of India (Sebi) introduced the concept of the Base Expense Ratio (BER), which will now represent the core fee charged by a mutual fund scheme for its operations.

The regulator has approved a significant overhaul of how mutual fund expenses are charged and disclosed. The move, aimed at enhancing transparency and investor protection, introduces a new cost structure framework and tighter cost caps across various mutual fund categories.

This BER will exclude all statutory and regulatory levies such as GST, stamp duty, securities transaction tax, Sebi fees, and exchange charges, which were previously bundled into the expense ratio. These charges will now be shown separately, giving investors a more transparent view of what they are paying.

As per the revised framework, the total mutual fund expense ratio will now consist of four separate components: the base expense ratio, brokerage, statutory levies, and regulatory levies.

It has also scrapped the additional 5 basis points that fund houses are currently allowed to charge across schemes.

This structural change is designed to simplify expense disclosures and help investors better understand fund costs, even if it does not result in an immediate reduction in overall expenses.

In addition to redefining cost components, Sebi has also lowered the BER limits across fund categories:

• Index funds and Exchange Traded Funds (ETFs) will now have a BER cap of 0.9%, compared to the earlier 1% that included statutory levies.
• Fund-of-funds (FoFs) investing primarily in index funds or ETFs will also face a 0.9% cap.
• FoFs investing over 65% in equity-oriented schemes will see their BER limit reduced to 2.10% from 2.25%, while other FoFs will move to 1.85% from 2%.
• Equity-oriented close-ended funds will have their BER capped at 1%, down from 1.25%.
• Non-equity close-ended schemes will be limited to 0.8%, a reduction from 1%.

Sebi has clarified that these revised limits are calibrated from earlier consultation drafts, ensuring that AMCs are not unduly burdened. The adjustments are designed to reflect the removal of statutory charges from the BER, rather than to aggressively cut fees.

While investors may not witness a dramatic drop in headline costs immediately, since statutory levies will still be charged separately, the restructured caps and separation of charges are expected to improve cost discipline across the mutual fund industry.

The move is also expected to limit the scope for hidden charges and give investors a clearer picture of what they are paying, ultimately enabling more informed investment decisions.

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