Decline in AUM to make equity MFs costlier, dent investor returns

An increase in TER could further dent investor returns, which have fallen significantly over the last month.

The total expense ratio (TER) of equity mutual fund (MF) schemes may rise following a steep drop in their assets under management (AUM) in the past two months. This could further dent investor returns, which have fallen significantly because of the market crash last month.

The AUM of equity schemes have declined 27 per cent to Rs 5.8 trillion at the end of March, from Rs 7.9 trillion two months ago. In the same period, the number of equity schemes that managed between Rs 10,000-50,000 crore has reduced to 14 from 21. Similarly, the number of schemes that fell in the range of Rs 5,000crore and Rs 10,000 crore has dropped to 23 from 35, the data from Value Research shows. This assumes significance as the TER for these schemes will have to be realigned

“The TER is a function of the size of the fund. Size changes with inflows and the net asset value (NAV) growth. So when the AUM grows the cost comes down. Similarly, if the AUM comes down, the TER would change as per slab,” said Swarup Mohanty, chief executive officer, Mirae Asset MF.

The TER is an annual charge deducted from the NAV daily. It includes fund management charges, marketing and distribution costs, and registrar and transfer agent (R&T) expenses, among others. Expenses for direct plans are typically lower as there are no commissions paid to the distributor.

The TER is calculated on a slab-based formula, and had seen a downward revision last year across equity and non-equity categories following a regulatory diktat.

“It is likely that TER might go up a bit to the extent the regulations permit. Moreover, the decline in the AUM has put pressure on the margins of fund houses and may necessitate an increase in expense ratios to the extent possible,” said Amol Joshi, a distributor.

Fund houses have to disclose the TER of their schemes daily. Investors need to be informed via email or SMS at least three working days before any changes in the TER are effected.