Sebi moves to reduce MF charges; industry reactions mixed

The Securities and Exchange Board of India’s (Sebi’s) latest consultation paper has proposed a reset in how mutual fund charge expenses, with the aim of reducing hidden costs and simplifying the way the Total Expense Ratio (TER) is structured.

Under the proposals, the expense ratio for open-ended schemes could be reduced by around 15 basis points, while for close-ended schemes, the reduction could be as high as 25 basis points.

For equity-oriented funds, the maximum TER may come down from 1.25% to around 1%. Similarly, for debt-oriented funds, the ceiling may reduce from 1% to 0.8%. A key proposal also relates to brokerage costs, which mutual funds incur every time they buy or sell securities. Currently, brokerage can go up to 12 basis points in the cash market and 5 basis points in derivatives. SEBI now proposes capping these at 2 basis points and 1 basis point, respectively. Industry experts feel that lower investor costs and clearer fee structures are seen as a positive step for investors, but brokerage caps and TER reductions may pressure AMC margins and alter distributor payouts.

This will also mark a significant shift in how research and execution have been bundled in the Indian market. Brokers have historically provided research, company access, and investment ideas along with execution, and fund houses effectively paid for these services through higher brokerage. Sebi’s stance is that research is already accounted for in the fund management fee and should not be charged again through brokerage. The objective is to end the practice of “bundled research” and ensure investors are not being charged twice.

Market reactions so far reflect cautious optimism. Sandeep Bagla, CEO of Trust Mutual Fund, believes the proposals are broadly favourable for investors, “If these proposals are implemented, mutual funds would be able to charge lower expenses on the funds they manage by 15–20 basis points. Brokerage paid on equity trades will reduce sharply. On a net basis, TER should reduce for the investor and returns will improve. AMCs will charge less, but most of this reduction will likely be passed on to distributors in the form of lower commissions,” he said, noting that the impact may be heavier on larger AMCs, while the changes could be relatively neutral to slightly positive for smaller fund houses.

On the other hand, Sandeep Parekh Managing Partner at Finsec Law Advisors cautions that fee caps require strong justification. “While the simplification and clarification are welcome, the consultation paper veers into territory which requires data to back up an attempt at price fixation. Imposing caps sounds investor-friendly, but it is not necessarily so. It places a higher burden on smaller mutual funds and could impact competition in the medium to longer term,”
he said.

Meanwhile, Col (Retd.) Sanjeev Govila, CEO of Hum Fauji Initiatives, takes a longer-term view. “These reforms may seem challenging initially, but history shows that past SEBI actions, including the abolition of entry load in 2008 and TER cuts in 2019, ultimately expanded the market. Lower costs mean investors gain more from their investments. Advisors can use this shift to prioritise quality advice and thoughtful asset allocation, rather than just transactions.”

Additionally, SEBI has proposed that statutory levies including STT, CTT, GST and stamp duty be shown outside the TER. Earlier, these were included within the expense ratio, often making it unclear to investors how much of the cost was attributable to the AMC and how much was tax. By separating statutory charges, SEBI aims to improve cost transparency and help investors better evaluate what they are paying for.

The paper also proposes allowing performance-linked expense ratios, where fees vary according to how the fund performs. If a fund outperforms, the AMC could charge more; if performance lags, the cost to investors would automatically decline. SEBI plans to finalize the operational framework after further industry consultations.

The broader question is whether the proposed framework will make mutual funds cheaper without significantly straining AMCs, brokers, and distributors. SEBI attempted a similar restructuring in 2023, but industry pushback prevented implementation. This time, the regulator’s approach is more measured but also firmer in its intent.

For investors, the direction is clearly beneficial cleaner disclosures, fewer hidden layers of charges, and reduced long-term cost drag. For AMCs and intermediaries, it marks a transition toward leaner operating models and greater accountability. The final outcome now hinges on how the proposals evolve post-consultation when feedback closes on November 17.