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More than two years after the capital market regulator Sebi initiated an exercise to review and rationalise the total expense ratio (TER) of mutual funds, the watchdog has indicated at a ‘status quo’ on the matter that had evoked strong responses from the mutual fund industry.

In an exclusive interaction with Moneycontrol, Sebi chairman Tuhin Kanta Pandey said the TER issue is not currently under review even as the regulatory body is looking at simplifying most of the regulations with an aim of ‘optimum regulation’.

“Till the time it is reviewed, it is status quo,” said Pandey, when asked about the status of the TER review process.

“Right now, together as an institution, we are trying to do a major simplification of our regulations… They should add up to an objective and the objective is optimum regulation,” he added.

Pandey, who took charge as Sebi chairman on March 1, further said that while there is an upper cap in the TER, the actual fee charged to the investors could be much lower.

The Total Expense Ratio (TER) in a mutual fund gauges the cost of running the scheme, and is calculated as the percentage of fund's assets under management (AUM) that is used to cover the fund's operating expenses. A higher TER implies a bigger portion of investment goes towards fund management cost.

Also Read: Sebi evaluating Total Expense Ratio process, to release detailed guidelines

He cited the example of broking firms, wherein many entities – mostly discount broking firms – do not levy any brokerage on cash market transactions even though the regulations have laid down a cap on broking charges.

Sebi chairman’s comments assume a lot of significance as the issue of TER was a sensitive one with many mutual fund houses unhappy with the regulator’s approach.

In December 2022, Sebi, under former chairperson Madhabi Puri Buch, had announced that it had initiated an internal study to re-look at the expenses that fund houses charge unitholders. A discussion paper was subsequently released in May 2023.

Incidentally, the issue went to the Sebi board in June 2023 but the deliberations remained inconclusive as former chairperson Buch said the mutual fund industry has given its feedback along with more granular data, based on which a second consultation paper would be issued, though no such discussion paper was released. The issue has been in cold storage since then.

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