A few days ago, Vanguard Inc, one of the world’s most prominent asset management companies, lowered the fee forinvestors, shaking up the whole industry. “Effective February 1, 2025, the firm reduced fees on 168 share classes across 87 funds. The fee reductions are expected to save investors more than $350 million this year alone,” it said in a statement.
Lower costs leave more money in investors’ hands and raise their potential returns. Indeed, across the industry, lower-cost funds have historically outperformed higher-cost funds on a net-of-expenses basis, Vanguard reasoned. The average asset-weighted expense ratio would be just 0.07 per cent for Vanguard across its $10 trillion under management — a sliver of the industry average of 0.44 per cent, said a Bloomberg report.
It’s going to be a catch-22 situation for its rivals such as Blackrock, Invesco and State Street Corp on whether to follow suit at the cost of their profits. Between 2004 and 2023, the asset-weighted average expense ratio fell from 0.87 per cent to 0.36 per cent, according to Morningstar Inc, that tracks the performance of mutual funds globally.
Slab-based TER
In India, SEBI allows slab-based total expense ratios for various categories of schemes, such as equity, debt, hybrid, and solution-oriented funds. Accordingly, equity funds can charge up to 2.25 per cent, non-equity schemes can charge up to 2 per cent as the base expense ratio.
SEBI has been working hard to bring down expense ratio. It, in fact, had suggested calculating TER including brokerage fee and GST on management fee at the asset management company level rather than at the scheme level. “This approach was aimed to provide a more holistic view on expenses incurred by mutual funds,” SEBI had then said. The regulator, however, put this proposal on hold after feedback from MF industry body AMFI. The consultation process is currently going on.
As per SEBI study, the industry average TER, including additional expenses charged by the regular plan of different open-ended schemes during the financial year 2021–22, stood at 2 per cent for equity schemes, 0.77 per cent for debt schemes, 1.88 per cent for hybrid schemes, and 0.11 per cent for ETFs. This ratio has further slipped currently. For instance, the TER has slipped to 1.4 per cent in January.
Retail investments
According to SEBI, retail investors invested more than 57.18 per cent of their investment in equity schemes and 17.49 per cent in hybrid schemes and the remaining 25.33 per cent in debt schemes, ETFs and other schemes such as index funds, solution oriented schemes, fund of funds, and so on.
The AUM of the Indian MF industry has grown from ₹11.81 trillion as on January 31, 2015 to ₹67.25 trillion as on January 31, 2025 more than 5-fold increase in a span of 10 years.
- Also read: Markets plunge for 8th straight day, worst run in 2 years
According to SPIVA Global (S&P Indices Versus Active), the first half of 2024 proved to be a particularly challenging market environment for active managers across global equity markets, as the outperformance of the very largest companies resulted in a high proportion of index constituents underperforming the benchmark return. In India, 77 per cent of actively managed Indian Equity Large-Cap funds trailed the S&P India LargeMidCap’s total return of 17.4 per cent at the end of June 2024. At 52 per cent, It is relatively better for mid/small-cap funds underperformed the S&P India SmallCap’s and 94 per cent of Indian Composite Bond funds and 74 per cent of Indian Government Bond funds lagged the 5.3 per cent return of the iBoxx ALBI India.
However, it is interesting to see, in the current downtrend, how many mid and small-cap schemes have managed to outperform the respective indices. The probability of a greater number of schemes underperforming the indices is higher given the constant selling pressure in that space.
In this scenario, lower expense ratio would no doubt enhance the return for the investors. With more and more players such as Jio BlackRock, Capitalmind, Choice International, Cosmea Financial Holdings, Angel One and Unifi Capital entering the AMC space, one could hope for further lowering of cost due to competition and growth in AUM.
Rewrite this news article and keep the same structure, information and length.
