Markets regulator Sebi on Tuesday cleared a proposal to cap the maximum total expense ratio (TER) — the fee that mutual funds (MFs) collect from investors every year to manage their money — for closed-ended equity schemes to 1.25% and other than equity schemes to 1%. The maximum TER for open-ended equity schemes will be 2.25%.
What is the total expense ratio and why is it important for investing in mutual funds?
Mutual funds are investments where an investor entrusts his/her money with an investment manager (of an asset management company) to manage the money smartly and efficiently. This money management comes at a cost, which is usually charged as a percentage of the investment. The official regulator of mutual funds has laid down rules on how much an asset management company can charge an investor to manage their funds. For an investor, this is important because it is a charge (called total expense ratio or TER in short) levied on their investment, and the money they get back from their investment is reduced by this figure.
So, for an investor, TER is an important number to focus on since it has a direct impact on their returns. However, it is not the only number to look at and investors should evaluate funds based on various parameters such as consistency of performance and risk levels.
SEBI has, across the board, lowered the TER that a fund house can charge its investors. The reduction is higher for larger funds and lowers for smaller funds — larger and smaller being a measure of how much money a fund manages.