Edelweiss Asset Management Company (AMC) has announced a significant hike in the total expense ratio (TER) cap for its Bharat Bond ETFs, from a near-zero 0.0001% to 1%. This represents a 2,000% increase, which may have far-reaching implications for investors. However, the AMC has clarified that the actual expense is expected to be only a few basis points, with a possible increase to 0.02% for the time being. The TER represents the annual cost of managing a fund, expressed as a percentage of its daily net assets, and an increase in TER reduces net returns, lowering the compounding potential over time.
The increase in TER is due to a directive from the Securities and Exchange Board of India (Sebi) to include all operational, statutory, and mandatory expenses within the TER. The Bharat Bond ETFs were launched as a cost-effective solution for retail and institutional investors, with an initial TER cap of 0.0001% to 0.0005%. The AMC has been allowed to align its TER with Sebi regulations, which means that previously external administrative costs, such as audit fees, registrar and transfer agent fees, and marketing expenses, must now be covered within the TER.
The AMC has highlighted that investment management and advisory fees have been set to zero to ease the expense burden, but the inclusion of these other costs will cause the TER to increase. For investors, the hike in TER highlights the importance of staying informed and regularly reviewing investment documents to be prepared for such changes. Sebi regulations offer investors the flexibility to exit without any exit load between February 3, 2025, and March 4, 2025.
It’s also important to note that indexation benefits are no longer available on Bharat Bond ETFs, which means that gains from these investments will now be taxed at an investor’s marginal tax rate, significantly reducing post-tax returns. However, investments made prior to April 2023 have been grandfathered, and gains in them after two years will be taxed at 12.5% (long-term capital gains tax). As of February 4, the Bharat Bond ETFs have delivered returns ranging from 5.49% to 8.51% since their inception, and Edelweiss Mutual Fund manages an AUM of around ₹58,000 crore in these ETFs.