The Securities and Exchange Board of India (Sebi) is likely to lower the cap on mutual fund expenses. At present, fund houses can charge up to 2.5% of average assets for equity schemes and 2.25% for debt schemes as annual expenses.It is likely that these would soon be cut to 1.5% for equity schemes, 1% for debt funds and 0.75% for index funds.

The market regulator is likely to take up the issue this month at the meeting of the mutual fund advisory committee. The mutual fund industry though is apprehensive.

“MFs are already reeling under higher redemptions from equity schemes, after the entry load ban. The lowering of expense caps could be the final nail in the coffin for us,” said the chief executive officer of a leading fund house.

After entry loads were banned by the market regulator in August 2009, mutual fund houses have been paying higher upfront commissions to the distributors from their own pockets; essentially they charged the fund higher marketing and distribution expenses.

“With expenses such as transaction costs, advisory fees and marketing expenses being pre-determined and not varying by a huge margin, many fund houses were seen changing their expense ratio frequently. This was a cause for concern and it is likely that a decision will be taken in the coming meeting,” said a committee member.

Either a flat expense ratio, of 1.5%, will be brought in or fund houses will be given the option to continue with the existing sub-limits for expenses, the member added.

The regulator is also planning to make expenses fungible so that fund houses have some flexibility while charging expenses.

At present, MF regulations permit equity funds to charge up to 2.5 % of average daily net assets for an initial Rs 100 crore of assets, 2.25 % for the next Rs 300 crore, 2% for the next Rs 300 crore and 1.75 % for anything above that (see chart). So, as corpus or assets of the mutual fund goes up, the expense cap comes down. For instance, as per present regulations a Rs 1,000-crore equity scheme cannot charge more than 2.05% as annual expenses.

Also, for equity assets, the investment management and advisory fee, which is part of overall expense cap, cannot exceed 1.25%. It is 0.25% less for debt schemes. This sub-limit is likely to go, if a flat fee structure.

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