​Executive Summary: SEBI has banned upfront commission payable to distributors and lowered the total expense ratio limit that can be charged by Mutual Fund houses to the MF investors. This will ensure that there will be less mis-selling and more transparency.

​Mutual funds are regulated by SEBI. One of the main functions of SEBI is to protect the interests of retail investors. On account of that, SEBI has made some amendments in its guidelines for the MF Industry.

Ban On Upfront Commission 
Upfront commission is defined the commission paid to the mutual fund distributor when the retail investor buys units of a mutual fund scheme. Upfront commission can be misused as retail investors can be asked to sell their units and buy other scheme units multiple times even when it is not in their best interests. The churn in investments is beneficial to the MF house and the distributors. SEBI has disallowed payment of this upfront commission. This will ensure that the retail investors’ investment interests are given priority.
As an exception, upfront commission is only allowed in MF SIP investments. But SEBI will be closely monitoring these transactions for irregularities.
The distributors will be paid trail commission. Trail commission cannot paid upfront.

Reduction in Investment Costs  
Expense ratio is the cost of investing in a mutual fund. The investor has to bear this cost proportionate to the investment made. It consists of the administrative and operating expenses. SEBI has put a cap on the maximum expense ratio that an MF can charge –

Source: https://www.sebi.gov.in/media/press-releases/sep-2018/sebi-board-meeting_40347.html

For other MF Schemes –

• The TER is capped at 1.25% for close ended equity schemes and interval scheme equity funds and at 1%for non-equity oriented close ended schemes and interval schemes. debt funds. 
• The TER is capped at a maximum of 1% on passive funds such as index funds and ETFs.
• TER is capped at 1% for Fund of Funds that invest in Liquid, Index and ETF schemes.
• TER is capped at 2.25% for Fund of Funds that invest in equity oriented schemes and at 2% for those that invest in non-equity oriented schemes.

If the investor is from a B-30 city (beyond top 30 cities), the expense ratio will increase by 0.30%. The capping on expenses will reduce the investment costs for an investor. 

Performance Disclosure on AMFI Website
A few months back, SEBI directed the Mutual Fund houses to compare their returns to Total Returns Index (TRI) of the benchmark as compared to the Price Return Index (PRI) of the benchmark. The PRI captures the changes in movements of prices of securities which constitute the benchmark. But the TRI goes a step ahead and captures the movement of prices and dividend/interest paid. The TRI is a better value to use as NAVs are based on capital gains/losses and dividends received in the portfolio. The investor will get a more accurate picture of the performance of his MF investments and how it compares to the benchmark. Fund managers have to ensure  that they take this into consideration while making the investments.

These SEBI rulings for the MF Industry will ensure that investors’ interests are protected and there is less mis-selling and better transparency.