SEBI’s Mutual Fund Fee Overhaul: Lower Costs, Higher Transparency for Investors

Over the past three decades, the regulatory landscape for mutual funds has undergone a dramatic transformation, though primarily through incremental adjustments. These changes have been introduced via amendments to the Mutual Fund Regulations of 1996 and through various circulars. Consequently, the regulations have accumulated several outdated and redundant provisions.

Hence, the Securities and Exchange Board of India (SEBI) has announced a significant overhaul of the mutual fund fee structure to make investments more transparent and cost-efficient. Since mutual fund expenses are deducted directly from a scheme’s Net Asset Value (NAV), even small reductions in expense ratios can substantially improve long-term returns.

In a draft released on October 28, 2025, SEBI proposed key revisions, including removing additional expense charges, tightening limits on brokerage fees, and excluding statutory levies from the total expense ratio. These reforms aim to simplify the cost framework, safeguard investor interests, and enhance operational efficiency across the industry. SEBI has invited stakeholder comments on the proposals by November 17, 2025.

India’s mutual fund industry, which began with a single entity—Unit Trust of India (UTI)—in 1963, has evolved substantially over the decades. UTI launched the country’s first mutual fund scheme, Unit Scheme 1964 (US ’64), which eventually collapsed in 2000 and required a bailout.

From managing a modest ₹6,700 crore in assets by 1988, the industry has expanded to encompass 48 players and now oversees assets worth more than ₹75.6 trillion. This remarkable growth underscores the importance of robust regulatory reforms that keep pace with the industry’s scale and the expectations of a maturing investor base.

Amendments SEBI has Proposed

One of the key proposals put forth is the removal of the additional five basis points (bps) that fund houses have been charging unit-holders across schemes. This charge was initially introduced in 2012 as a temporary measure to compensate Asset Management Companies (AMCs) for distribution expenses resulting from changes to the exit load framework. To mitigate the impact of discontinuing this five bps levy, SEBI has proposed a corresponding increase of 5 bps in the first two slabs of the expense ratio under the revised fee structure.

SEBI explained, “For the sake of transparency and investor protection, Regulation 52(6A)(c), which allowed mutual fund schemes to levy an additional five bps on the entire Assets Under Management (AUM) of applicable schemes, was based on the earlier practice of AMCs using exit loads to pay distributor commissions and cover marketing expenses. When exit loads were required to be credited back to the scheme in 2012, AMCs were permitted to charge an additional 20 bps to the scheme expenses. This was subsequently reduced to 5 bps in 2018.”

It further stated, “As this five-bps charge was designed to be temporary, it has now been removed from the draft mutual fund regulations to rationalize costs for investors.” However, to help AMCs adjust to this change, “the first two slabs of the expense ratio applicable to open-ended active schemes have been increased by five bps,” SEBI added.

The draft regulations also propose excluding all statutory levies—including the Securities Transaction Tax (STT), Goods and Services Tax (GST), Commodity Transaction Tax (CTT), and stamp duty—from the expense ratio limits. Currently, while GST on management fees is charged in addition to the Total Expense Ratio (TER) limit, other statutory charges are included within the TER.

SEBI’s proposal aims to make expense ratios exclusive of statutory levies, ensuring that any future changes in government-imposed charges are directly passed on to investors. Consequently, TER limits have been reduced to reflect GST on all expenses except management fees. This shift means that unit-holders will directly bear any modification to statutory levies.

Under the current rules, AMCs are allowed to charge a brokerage and transaction cost of up to 0.12% of the trade value for cash market transactions and 0.05% for derivatives. Data analysis indicates that brokerage payments for arbitrage funds—ranging from 1.18 bps to 1.34 bps between April 1, 2023, and March 31, 2024—are typically much lower than those for other equity schemes, which paid between 5 bps and 12 bps over the same period.

SEBI noted that the higher brokerage in some cases can be attributed to bundled services, such as research, which are inherent to fund management and already compensated through advisory fees. This results in investors paying twice for research: once through advisory fees and again through brokerage. To protect investor interests and ensure fair expense allocation, SEBI has proposed reducing the maximum permissible brokerage for cash transactions from 12 bps to 2 bps and for derivatives from 5 bps to 1 bps. These revised limits apply exclusively to brokerage, while all other execution-related costs may continue to be charged on an actual basis.

Furthermore, statutory levies such as STT, CTT, GST, and stamp duty on trades will now fall outside the revised brokerage caps of 2 basis points (bps) and one bps. SEBI also clarified that the TER will now explicitly include the permissible expense ratio, brokerage, exchange, and regulatory fees, and statutory levies—providing enhanced transparency for investors.

SEBI on the Tightrope

For the mutual fund industry, this feels like a repeat of 2009, when the market regulator abolished entry loads to remove upfront fees that investors paid when purchasing mutual fund schemes. Sixteen years later, Sebi’s latest consultation paper aims to further rationalize costs by bringing more transparency, clearer disclosures, and tighter margins. While this shift benefits investors, it could pose challenges for the industry.

Under the new framework, the TER will finally reflect what investors assume it covers. By excluding statutory taxes from the TER but requiring combined disclosure of TER plus brokerage, exchange fees, and other statutory levies, Sebi is pushing the sector toward an “all-in cost” model rather than selectively advertised figures.

This should make it easier for investors to compare funds across categories and lower the risk of overlapping charges—such as advisory fees and embedded research costs. In essence, investors stand to gain from reduced friction and greater transparency.

However, the implications for the mutual fund ecosystem remain uncertain. The changes represent a significant challenge to business models that rely on murky fee structures. Some large AMCs could face a nearly 30 percent hit to their profits. Given that the industry earns approximately ₹15,000 crore in total profits while managing ₹75 lakh crore in assets for 250 million investors, even a minor 5-basis-point reduction in TER could significantly impact margins. Although large AMCs might absorb the impact, any reduction in distributor commissions could hurt investor outreach efforts—particularly when Sebi and the industry are striving to grow participation.

Brokerages are likely to bear the biggest brunt. With an estimated 80 percent cut in charges, the current brokerage income of ₹1,500–1,800 crore could sharply decline. Even though most AMCs maintain internal research teams, they still rely on broker insights and analyst reports. SEBI’s move to unbundle costs echoes a similar policy introduced in Europe in 2018 under MiFID II, where research expenses were separated from trading commissions to increase transparency and reduce conflicts of interest.

However, the unintended result was a significant decline in independent analyst research, especially for smaller companies, as the standalone cost of research proved too steep. This forced a partial rollback of the rule three years later. As SEBI pursues this reform, it may need to carefully balance the interests of investors with the industry’s sustainability.