Edelweiss Asset Management Company (AMC) has announced a steep hike in the total expense ratio (TER) cap for its flagship Bharat Bond ETFs—from a near-zero 0.0001% to 1%, a move that could have far-reaching implications for investors.
That’s a staggering 2,000% increase. However, the AMC has clarified that the actual expense is only expected to be a few basis points despite the increase in the cap. A letter from Edelweiss AMC indicated that the expense ratio may only be increased to 0.02% for the time being.
TER represents the annual cost of managing a fund, expressed as a percentage of its daily net assets. Increase in TER reduces net returns, lowering the compounding potential over time.
On 30 January, Edelweiss AMC formally informed unit holders about this change, which will come into effect on 5 March. While the AMC explained that the increase was necessary due to a directive from the Securities and Exchange Board of India to include all operational, statutory, and mandatory expenses within the TER.
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Why did Edelweiss increase its TER?
The Bharat Bond ETFs were launched as a cost-effective solution for retail and institutional investors looking for exposure to high-quality public sector bonds. The TER was initially capped between 0.0001% and 0.0005%—as part of a bid submitted by Edelweiss AMC to the Government of India in 2018.
According to a December 2024 directive from the Department of Investment and Public Asset Management (DIPAM), Edelweiss AMC was allowed to align its TER with the Sebi (Mutual Funds) Regulations, 1996. This 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.
“DIPAM has permitted an increase in TER only to cover mandatory and statutory expenses, with the condition that the AMC cannot charge management fees. The same is clearly mentioned in the fundamental attributes change. As a result, the TER increase will be limited to just a couple of basis points. Currently, statutory expenses are approximately between 1.5 to 2 bps,” said Radhika Gupta, managing director and CEO of Edelweiss AMC.
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While the AMC highlighted that investment management and advisory fees have been set to zero to ease the expense burden, the inclusion of these other costs will cause the TER to increase.
For many investors, however, the hike in the TER highlights the importance of staying informed and regularly reviewing the details in investment documents to be prepared for such changes. Sebi regulations offer investors the flexibility to exit without any exit load between 3 February 2025 and 4 March 2025.
It’s also important to note that indexation benefits are no longer available on Bharat Bond ETFs.
In the Union Budget for 2024-25, the government announced that long-term capital gains (LTCG) benefits with indexation—or adjusting for inflation, which was previously applicable to debt mutual funds—would be removed for investments made after 1 April 2023. This means gains from Bharat Bond ETFs 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. This means that gains in them after 2 years will be taxed at 12.5% (long term capital gains tax). However indexation has been removed for such gains and this has driven up the effective tax rate.
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As of 4 February, the Bharat Bond 2025 ETF has delivered 5.49% since inception in July 2020. It will mature in a few months in April 2025. The Bharat Bond 2030 ETF posted 7.58% since launch in December 2019 and the Bharat Bond 2031 posted 5.96% since it was launched in July 2020.
The Bharat Bond 2032 ETF delivered 6.64% CAGR since it was launched in December 2021. The Bharat Bond 2033 ETF was launched in December 2022 and has delivered 8.51% since launch. Edelweiss Mutual Fund manages an AUM of around ₹58,000 crore in these four Bharat Bond ETFs.
