SEBI’s Mutual Fund Cost Overhaul: What Investors and the Industry Must Know
The Securities and Exchange Board of India (SEBI) has released a fresh consultation paper proposing sweeping changes to the way mutual funds charge expenses and disclose costs. This move has the potential to reshape how investors evaluate funds, how asset management companies (AMCs) design their products, and how distributors operate. For India’s fast-growing mutual fund industry, these rules mark the beginning of a new era of transparency and cost discipline.
At the core of the proposal lies the principle that investors must know exactly what they are paying for, and AMCs must justify every rupee charged. SEBI has tried to simplify expense structures, curb hidden costs, and align fund manager incentives with investor outcomes.
What SEBI Has Proposed
The consultation paper highlights several key changes.
First, statutory levies like Securities Transaction Tax (STT), Goods and Services Tax (GST), and stamp duty will no longer be counted inside the Total Expense Ratio (TER). They will instead be disclosed separately. This allows investors to compare TERs across schemes without distortion from government-imposed charges.
Second, SEBI has proposed sharp reductions in brokerage fees that can be charged to schemes. The cap on cash market transactions will be reduced from 12 basis points (bps) to just 2 bps, while the cap on derivative transactions will fall from 5 bps to 1 bps. This step is particularly significant for arbitrage and high-turnover funds that rely on frequent trades.
Third, the extra 5 bps allowance linked to exit loads is being removed. This closes a window through which funds could quietly pad expenses.
Fourth, the expense ratio slabs for open-ended active schemes are being revised upward by about 5 bps for the first two categories. This compensates AMCs partly for the tighter rules on brokerage, though investors may see marginally higher headline TERs.
Fifth, SEBI has floated the idea of an optional performance-linked TER. This means AMCs could charge investors more in years when the scheme delivers superior returns, provided disclosures are clear and benchmarks are defined.
Finally, SEBI is relaxing restrictions on AMC business activities under Regulation 24. AMCs may undertake businesses beyond mutual funds through separate units, provided they have safeguards like Chinese walls, segregated employees, and stronger trustee oversight.
Why These Changes Matter
The biggest advantage for investors is clarity. By moving levies outside TER and capping brokerage costs, SEBI ensures that the number investors see in the factsheet truly reflects fund management and distribution costs. Hidden leakages through brokerage commissions or bundled levies will now be harder to justify.
For AMCs, these proposals mean tighter cost discipline but also new opportunities. The optional performance-linked TER could help differentiate premium fund managers, though it also raises the risk of complex fee structures. The flexibility to run non-MF businesses may attract large financial conglomerates to expand their offerings, provided they maintain strict separation of resources.
For distributors, the sharp cut in brokerage caps means that execution-based earnings will shrink. The industry will increasingly move toward advisory-led distribution, where the focus shifts from churning trades to delivering long-term value.
Risks and Concerns
While these reforms are bold, they are not without challenges. Moving statutory levies outside the TER could lead to investor confusion unless disclosures are simple and prominent. A fund with a lower TER may still cost more once levies are factored in.
Performance-linked TERs must be designed with safeguards like hurdle rates and high-water marks to prevent excessive fee extraction in good years while leaving investors stranded in bad years.
There is also a compliance burden. AMCs will need to rework distributor agreements, update scheme documents, and set up oversight committees. Trustees will be expected to play a much stronger role in monitoring business separation and investor protection.
The Way Forward
The consultation paper is open for comments until mid-November 2025. Final regulations are expected soon after. Investors should watch closely how their funds respond — whether they adopt performance-linked TERs, whether their brokerage disclosures change, and how total costs evolve.
This is not just a technical regulatory change. It is part of a broader trend of SEBI cleaning up mutual fund governance, following earlier reforms on exit loads, inclusion-linked commissions, and scheme disclosures. The net effect will likely be positive for long-term investors, but vigilance remains key.
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GS Paper Mapping
- GS Paper 3 (Indian Economy): Issues relating to mobilization of resources, financial markets, SEBI’s role in investor protection.
- GS Paper 2 (Governance): Regulatory oversight, accountability of financial institutions.
- GS Paper 4 (Ethics): Transparency, fiduciary duty of AMCs toward investors.
One-Liners for Quick Revision
- SEBI proposes removing statutory levies from TER cap, to be disclosed separately.
- Brokerage cap cut to 2 bps (cash) and 1 bps (derivatives).
- Extra 5 bps exit-load allowance to be scrapped.
- TER slabs revised upward by ~5 bps for active schemes.
- Optional performance-linked TER introduced.
- AMC business diversification allowed under Reg-24 with safeguards.
