I want clarity on how brokerages paid by the AMC are included in the expense ratio of a fund. For example, if a particular mutual fund gives a brokerage of 1 per cent to its channel partners, to what extent does this 1 per cent contribute to the overall expense ratio? Nowadays close-ended mutual funds are offering as much as 7 per cent to the brokers (banks) on their collections during the NFO period. How this is accounted as a constituent of the overall expenses ratio?
- Harshhal Bandez
All the expenses incurred by an AMC, including payments to channel partners will have to be contained within the SEBI specified expense limits. According to regulation 52 of SEBI Mutual Fund Regulations, there are statutory limits on fees and expenses charged by mutual fund schemes. Accordingly, an equity fund can charge maximum of 2.5 per cent as expense ratio (with additional sums for investor education and B 15 cities) and a debt fund can charge 2.25 per cent. Fund houses are banned from paying upfront commissions to channel partners out of the investor's money. Therefore, any upfront incentive paid to channel partners in closed end funds comes out of the AMC's own kitty. It does not impact the investor.
Following table shows the charges included in expense ratio of a fund on an annual basis. SEBI removed internal limits on these expenses in September 2012. Mutual funds can now allocate the charges in the way they want. Brokerage also forms part of the total expenses of a fund.
| Expense Head | % of Daily Net Assets |
| Investment Management and Advisory Fees | Upto 2.50% |
| Trustee Fees | Upto 2.50% |
| Audit Fees | Upto 2.50% |
| Custodian Fees | Upto 2.50% |
| RTA Fees | Upto 2.50% |
| Marketing & Selling expense including agent commission | Upto 2.50% |
| Cost related to investor communications | Upto 2.50% |
| Cost of fund transfer from location to location | Upto 2.50% |
| Cost of providing account statements and dividend redemption cheques and warrants | Upto 2.50% |
| Costs of statutory advertisements | Upto 2.50% |
| Cost towards investor education and awareness (atleast 2 bps) | Upto 2.50% |
| Brokerage & transaction cost over and above 12 bps for cash market trades | Upto 2.50% |
| Service tax on expenses other than investment and advisory fees | Upto 2.50% |
| Service tax on brokerage and transaction cost | Upto 2.50% |
| Other expenses | Upto 2.50% |
| Maximum total expense ratio (TER) permissible under Regulation 52 (4) and (6) (c ) | Upto 2.50% |
| Additional expenses under regulation 52 (6A) (c ) | Upto 0.20% |
| Additional expenses for gross new inflows from specified cities under regulation 52 (6) (b) | Upto 0.30% |
This article was originally published on July 23, 2014.
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