TER clarity a welcome step, but India’s MF industry still far from scale: Feroze Azeez

The Securities and Exchange Board of India (SEBI), India's market regulator, has consistently aimed at fostering a transparent, efficient, and investor-friendly capital market. One significant area of its focus has been the mutual fund industry, a crucial avenue for retail investors to participate in the growth story of the Indian economy. The recent move by SEBI to unbundle statutory levies from the Total Expense Ratio (TER) of mutual funds is another step in this direction, primarily aimed at enhancing transparency for investors.

**Background Context: Understanding TER and its Components**

To truly grasp the significance of SEBI's decision, one must first understand the Total Expense Ratio (TER). TER represents the annual cost of operating a mutual fund scheme, expressed as a percentage of the fund's average net assets. It's essentially what investors pay to the asset management company (AMC) for managing their money. Historically, TER comprised various operational expenses, including fund management fees, registrar and transfer agent fees, marketing and distribution expenses, and audit fees. Crucially, certain statutory levies like Goods and Services Tax (GST) on management fees and stamp duty on mutual fund transactions were also bundled *within* the TER. While these costs were disclosed, their inclusion within a single TER figure sometimes obscured the exact breakdown of operational costs versus government-mandated taxes.

**What Happened: The Unbundling Mandate**

SEBI's recent directive mandates the 'unbundling' of these statutory levies from the TER. This means that expenses such as GST on investment management fees and transaction costs like stamp duty will now be charged *over and above* the stated TER. The core objective behind this move is to provide greater clarity and transparency to investors. By separating the operational costs of managing a fund (reflected in the TER) from government taxes, investors can get a clearer picture of what they are paying for fund management services versus what goes to the government as levies. This clarity is expected to help investors make more informed decisions by accurately comparing the expense ratios of different funds, without the distortion of varying tax impacts.

**Key Stakeholders Involved**

Several key stakeholders are directly impacted by this regulatory change:

1. **SEBI (Securities and Exchange Board of India):** As the primary regulator of the Indian securities market, SEBI's role (established under the SEBI Act, 1992) is to protect the interests of investors in securities and to promote the development of, and to regulate the securities market. This unbundling move aligns with its mandate of investor protection and market transparency.

2. **Asset Management Companies (AMCs) / Mutual Fund Houses:** These entities manage the mutual fund schemes. The change requires them to adjust their accounting and disclosure practices. While the actual outgo for investors (TER + levies) might not change drastically, the reported TER will appear lower, potentially impacting how funds are perceived and marketed. Industry experts like Feroze Azeez of Anand Rathi Wealth caution that while structural clarity is welcome, excessive cost tinkering could harm the 'thin-margin' nature of the business, potentially impacting their ability to invest in research, talent, and technology, which could indirectly affect investor outcomes.

3. **Investors:** Retail and institutional investors are the ultimate beneficiaries of enhanced transparency. They can now better understand the true cost of managing their investments versus the taxes levied by the government. This allows for a more accurate comparison of fund costs.

**Why This Matters for India: Economic and Governance Impact**

This regulatory refinement holds significant implications for India's financial landscape. Firstly, it strengthens **investor protection**, a cornerstone of SEBI's regulatory philosophy. Clearer cost structures empower individual investors, who are often less financially literate, to make better choices. Secondly, it contributes to the **development of a mature capital market**. A transparent market builds trust, encouraging greater participation from both domestic and international investors. India's mutual fund industry has grown exponentially, managing assets worth over ₹50 lakh crore (as of late 2023). Regulatory clarity ensures this growth is sustainable and equitable. Thirdly, it is part of India's broader **economic governance** framework, where regulators continuously strive to balance market efficiency with investor safeguards. This move reflects a proactive approach to fine-tuning regulations in response to market dynamics and investor needs.

**Historical Context and Future Implications**

SEBI has a long history of regulating mutual funds, starting with the SEBI (Mutual Funds) Regulations, 1996, which have been amended numerous times to adapt to market changes. Over the years, SEBI has consistently sought to rationalize TERs, understanding that high costs can erode investor returns. Previous reforms included capping expense ratios and mandating direct plans with lower TERs. This current unbundling is a continuation of that trajectory, focusing on granular transparency rather than just overall reduction. In the future, this move might lead to a more nuanced understanding among investors about fund costs. It could also intensify competition among AMCs on their core fund management fees (the 'unbundled' TER), potentially driving down these costs over time. However, the industry's concern about thin margins remains pertinent. SEBI will need to continuously monitor the impact to ensure that while transparency is achieved, the industry's viability and capacity for innovation are not jeopardized, which could ultimately harm long-term investor interests. This dynamic interplay between regulation, industry health, and investor benefit will continue to shape the evolution of India's mutual fund sector.

**Related Constitutional Articles, Acts, or Policies**

The foundational legal framework for this regulatory action stems from the **Securities and Exchange Board of India Act, 1992**. This Act empowers SEBI to regulate the securities market and protect investors' interests. Specifically, the **SEBI (Mutual Funds) Regulations, 1996**, and subsequent amendments provide the detailed regulatory framework for the functioning of mutual funds in India. While there isn't a direct constitutional article dictating mutual fund TERs, the Union List (Seventh Schedule) of the Indian Constitution, specifically **Entry 48 (Stock exchanges and futures markets)** and **Entry 97 (Residuary powers)**, provides the legislative competence for the Union Parliament to enact laws concerning capital markets, thereby enabling the creation of bodies like SEBI and their regulatory powers. This initiative also aligns with the broader policy goal of fostering financial inclusion and robust capital markets, crucial for India's economic growth.