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Expense ratio hike eating into your mutual fund portfolio

Expense ratio hike eating into your mutual fund portfolio

The Securities and Exchange Board of India had earlier this year allowed mutual funds to increase the expense ratio by 0.20 percentage point for all investors and another 0.30 percentage point for investors in specified small towns.

Have you realised that your mutual fund investments have become expensive ? Fund houses have increased the charge deducted towards meeting their recurring expenses from 1 October 2012.

The charges have been increased by 0.2-0.5 percentage point. If you include the service tax of 12.36% on the fund management fee, your overall cost would has gone up to 3% of your investment against the earlier cap of 2.5%.

The charge towards expenses, also called expense ratio, include fund management fee, distributors' fee, brokerage, advertising and investor education cost, etc.

The Securities and Exchange Board of India (Sebi) earlier this year had allowed mutual funds to increase the expense ratio by 0.20 percentage point for all investors and another 0.30 percentage point for investors in specified small towns.

It also removed the sub-limits on expenses under different heads such as 1.25% cap on fund management fee and 0.5% cap on distributors' fee. Almost all fund houses have increased the expense ratio by 0.2% for all investors and an additional 0.3% on investments coming from small towns from 1 October 2012. Close to 15% of the total industry assets are accounted for by smaller cities.

However, there is no clarity on the structure of the total expense ratio. Mutual funds can now allocate the fee under different heads without any upper limit. Earlier, it was mandatory to disclose how the money was being allocated.

"Mutual funds are now not bound to disclose how they are using the fee collected through expense ratio. Some fund houses may charge the entire expense ratio under fund management fee," says Jimmy Patel, chief executive officer, Quantum Mutual Fund.

If a fund house charges the entire fee under the head of fund management fee, investors will have to pay a higher service tax as the entire amount will come under the purview of the levy.

The service tax on fund management fee would have to be paid separately by investors over the expense ratio. Earlier, the service tax on fund management was part of the total expense ratio.

At 1.25% fund management charge, the service tax would be 0.155% of the total corpus. If the management charge is increased to 2%, the service tax to be paid by the investor will be 0.25% every year. "We are yet to take a call on increasing the fund management fee," says Vikas Sachdeva, chief executive officer, Edelweiss Mutual Fund.

Quantum Mutual Fund is probably the only fund house not to hike expense ratio, says Patel. Not all mutual fund schemes, though, charge the full expense ratio. Funds with large assets usually charge a lower expense ratio than the permitted level as costs go down with a bigger corpus. Direct investors can, however, expect no impact on their costs as fund houses will now charge a lower expense ratio from them.

The total expense ratio charged by mutual funds is usually disclosed in the monthly fund factsheet of the scheme. If it's not there, one can see it in the scheme information document.