Market regulator Sebi today asked mutual fund houses to give investors the option to

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cash out when the fund administration fee goes up as a result of new rules.

Currently, MFs charge investors a flat fee of 2.25 per cent on the average of daily or weekly net assets.

Sebi had, in a July 29 notification, said that the total expense, including management fees, charged from investors in a fund-of-fund scheme should not exceed 0.75 per cent of either the daily or weekly average net assets -- which would benefit the investor.

Alternatively, it said that fund houses could cap the management expenses at 0.75 per cent and fix their own fee for administrative expenses, provided the total charge does not exceed 2.5 per cent of the daily or weekly average net assets.

In the case of an index fund scheme or exchange traded fund, Sebi wanted that the total fee charged from an investor, including the investment and advisory expenses, does not exceed 1.5 per cent of the weekly average net assets.

"Fund-of-fund schemes existing as on July 29 shall with the approval of trustees adopt either of the total expense structures laid out... And change the total expense structure after giving the unit holders an option to exit," Sebi said in a circular.

Fund-of-fund schemes are those where a mutual fund invests in a scheme of another MF.

Sebi had issued revised regulations to the fund houses for prescribing changes in the calculation of total expenses charged by them from investors. The expense fee charged by MF houses from investors include redemption expenses, investment management and advisory fees, among others.

The fund houses have come under Sebi's scanner for allegedly giving their agents and distributors lavish incentives like cash payouts and foreign junkets in return for higher sales. They choose to include this expenditure under the head of management expense, thereby charging investors for the same.

Instances of distributors of various fund houses being showered with cash incentives and trips to exotic locations in India and abroad have come to light since the practice of charging an entry-load from investors was scrapped last year.

Entry load is the commission that an investor has to pay while purchasing units of a mutual fund