MFs cut trail commissions after SEBI reduces total expense ratio for investors

Mutual fund houses have cut their trail commission after the reduction in total expense ratio or TER, thereby bringing down their costs.

Trail commission, which is paid by fund houses to distributors, has been reduced by 15 to 20 basis points after the rationalisation of TER by the Securities and Exchange Board of India.

TER is the total cost an investor has to bear while investing in a mutual fund scheme.

Costs such as registrar fee, fund management fee, distributor commission, advertising expense, and custodian's share are borne by investors as a percentage of assets managed by the fund house.

Trail commission is paid every year to the distributor until the investment is withdrawn by an investor.

In May, SEBI had reduced the additional expense charged by mutual funds from 20 bps to 5 bps.

Earlier, mutual funds were allowed to charge additional expenses of up to 0.20 percent or 20 basis points of the daily net assets of mutual fund schemes, in lieu of the exit load credited to the scheme.

DSP BlackRock reduced charges for its tax saver fund in May, and also reduced the commission rates for equity schemes in June.

IDFC Mutual Fund too reduced the brokerage it paid to distributors by 15 bps on all its schemes in June.

As many as eight fund houses have reduced trail commissions and others are in the process of doing so.

"After SEBI has cut the total expense ratio in mutual funds, fund houses are passing the reduction in total expense ratio to distributors by lowering their commission," said a sales head of a private fund house.

The regulator has reviewed the additional expenses of up to 30 bps charged by fund houses for inflows from B15 cities, and made it applicable to 'B30 cities'.

So, in order to claim the additional 30 bps expense ratio, the fund houses will have to to bring the proportionate inflows from B30 cities now, instead of B15 cities.

At present, the inflows from B30 cities form a small portion of the total assets under management in the industry.