AMCs Fooling Direct Investors by Increasing Mutual Fund Expense Ratio?

Asset Management Companies (AMCs) manage mutual funds , since they cannot charge distribution commission to direct plans, are using different way through AMC fees. Several AMCs have increased the direct plan expense ratio (AMC fees) after SEBI reduced the expense ratio cap of a mutual fund. Sebi’s intention was to bring down the expense ratio, but it resulted in expense ratio going up for some of the direct plan investors.

In several cases, AMCs used to charge the maximum possible expense ratio on regular plans and therefore after SEBI’s action, they had no option but to cut expense ratio for regular plans.

However, the expense ratio was much less compared to maximum cap on direct plans, AMCs planned to increase the expense ratio on them. This way they are compensating the losses suffered as the result of the reduction in regular plan expense ratio.

SEBI Regulation on AMCs

Currently, for actively managed equity schemes, AMC charge the total expense ratio of 2.5% for the first Rs 100 crore of average weekly net assets, 2.25% for the next Rs 300 crore, 2% for the subsequent Rs 300 crore and 1.75% for the remaining assets under management. The panel are looking to put a cap on maximum total expense ratio at 2.25% against the existing 2.5% .

The expense ratio of large cap mutual fund schemes is expected to be limited to 1.25% if the panel’s recommendations are implemented. In the latter case, 2.25% will be the highest expense ratio that will be charged for the first Rs 500 crore of assets

The expense ratio need to be cut as assets increase. For the next Rs 500-2,000 crore, the expense ratio will then be charged at 2%. Between Rs 2,000 crore and Rs 5,000 crore, AMCs will charge 1.75%. For Rs 5,000-20,000 crore, the ratio charged will be be 1.5%.

Recent communication from Axis Mutual Fund for Direct Plan Investors:

NOTICE FOR CHANGE IN THE BASE TOTAL EXPENSE RATIO

This is to inform that the Base Total Expense Ratio (Base TER) charged under Regulation 52(6) of SEBI (Mutual Funds) Regulations, 1996 for Axis Bluechip Fund Fund – Direct Plan is changed from 0.60% to 0.72% w.e.f. May 28, 2019.

Investors are requested to kindly take note of the same.

Best Regards,
Axis Asset Management Company Limited

Mutual Fund Direct Plans Worth?

There is no advantage for the investors to go for direct plans as  they have very low expense ratio now, especially at actively managed equity funds where the expense ratio is less than 50 bps. This is because the chance of AMCs increasing the expense ratio in future is high. There is no probability that this issue gets resolved in near term, atleast not in three months.