SEBI overhauls mutual fund rules: Changes made to TER framework; check details

In a landmark move, the Securities and Exchange Board of India (SEBI) board on Wednesday greenlit a sweeping overhaul of mutual fund regulations, ushering in the SEBI (Mutual Funds) Regulations, 2026. This replaces the outdated 1996 framework following an extensive review, prioritizing investor protection through enhanced cost transparency and reduced expense burdens.

At the heart of the changes is a revamped Total Expense Ratio (TER) structure. Statutory levies, including Securities Transaction Tax (STT), Commodities Transaction Tax (CTT), GST, stamp duty, SEBI fees, and exchange charges, will now be billed on actuals, separate from the base expense ratio (BER). This ensures investors see a clearer picture of core fund costs without hidden add-ons.

SEBI also scrapped the additional 5 basis points (bps) expense allowance tied to exit loads, streamlining fees further. Brokerage and distribution commissions face tighter rationalized caps to curb excesses. Notably, equity cash transaction brokerage limits rise to 6 bps from the proposed 2 bps, though still below the current 12 bps average, while derivative deals see a hike from 1 bps to 2 bps (excluding levies). Performance-linked expense structures gain approval for select schemes, rewarding strong returns.

These reforms aim to make mutual funds more affordable and efficient, potentially boosting retail participation amid India's booming markets. Industry experts hail the TER exclusions as a "game-changer" for transparency, though fund houses may need to adapt quickly.

The Total Expense Ratio (TER) will now consist of the Base Expense Ratio (BER), brokerage and statutory or regulatory levies.

SEBI has reduced the base expense ratio cap for index funds and ETFs to 0.9% from 1.0%, cut the limit for liquid-scheme-based fund of funds to 0.9%, and lowered the cap for close-ended equity schemes to 1% from 1.25%.

Highlighting the broader overhaul, SEBI Chairman Tuhin Kanta Pandey said the regulations have been significantly streamlined, with their length reduced by about 44% from 162 pages to 88 pages and the word count cut by nearly 54%, from around 67,000 words to about 31,000 words. "Key highlights include improved clarity on statutory levies and expense ratio limits, which are now referred to as the Base Expense Ratio," the SEBI chief said on Wednesday.