SEBI’s new MF rules boost transparency, won’t materially impact fund house profitability, say experts

SEBI’s sweeping overhaul of mutual fund expense regulations is unlikely to trigger any immediate shift in investor portfolio strategies, with the primary benefit being improved transparency rather than meaningful cost reductions, according to market participants and fund industry executives.

The Securities and Exchange Board of India (SEBI) recently announced its first major revamp of mutual fund expense rules in nearly three decades. The changes focus on unbundling the Total Expense Ratio (TER), a move aimed at giving investors a clearer view of what they pay fund houses for management and what portion goes to the government in the form of taxes and statutory levies.

BER vs TER

Under the revised framework, TER has been split into two components: a Base Expense Ratio (BER), which reflects the fee charged by asset management companies (AMCs), and statutory costs such as GST, securities transaction tax and stamp duty. Earlier, these charges were bundled together, making it difficult for investors to assess the true cost of fund management.

Varun Fatehpuria, Founder and CEO of Daulat Finvest, told CNBC TV18 that the unbundling exercise significantly improves transparency. “Investors will now be able to see exactly how much they are paying the AMC and how much is being collected as taxes or regulatory charges,” he said. However, Fatehpuria cautioned that the actual savings for investors are likely to be limited, as the revised BER excludes statutory costs and has only been marginally reduced.

He added that the changes enhance accountability, as any future reduction in fund management fees or increase in regulatory charges will now be clearly visible, rather than being absorbed within a single expense figure.

Brokerage fees

Another key element of the overhaul is the introduction of tighter caps on brokerage fees paid by mutual funds. SEBI has capped brokerage at six basis points for cash market transactions and two basis points for derivatives. Fatehpuria said this move addresses long-standing concerns around cost discipline and potential double charging, while being less disruptive than earlier proposals.

Industry leaders also believe the changes will not materially impact fund house profitability. Amisha Vora, Chairperson and Managing Director of PL Capital, and DP Singh, Deputy Managing Director and Joint CEO of SBI Mutual Fund, said SEBI’s decision to reduce the base expense ratio by 10 basis points—rather than the previously proposed 15 basis points—has brought relief and clarity.

Singh said the regulator had taken industry feedback into account and applied the changes in a balanced manner. While he acknowledged that the removal of the five basis points earlier linked to exit loads would affect revenues, he said rising market volumes and assets under management should offset the impact. “The overall effect is not very high,” he noted.

Vora, however, flagged concerns for the institutional broking industry, noting that the brokerage caps could pressure earnings. She added that if mutual funds uniformly pay the permitted rates, the impact on research coverage would remain manageable as market activity expands.