The Securities and Exchange Board of India (SEBI) has proposed a significant overhaul of mutual fund fee structures, a move that could lead to increased returns for investors. The proposals, outlined in a consultation paper, aim to simplify regulations, enhance transparency, and reduce costs for mutual fund unit holders. SEBI is inviting public comment on the proposals until November 17, 2025.

Key Proposals

• Lower Brokerage Fees: SEBI proposes to significantly reduce the maximum brokerage fees that mutual funds pay for buying and selling investments. For cash market transactions, the cap could decrease from 12 basis points (bps) to 2 bps. For derivatives transactions, the cap may drop from 5 bps to 1 bps. This could save mutual fund investors crores in hidden costs.
• New Rules for Total Expense Ratio (TER): The TER is the annual cost to manage a fund. SEBI suggests excluding costs like brokerage fees and taxes such as the Securities Transaction Tax (STT), Goods and Services Tax (GST), and stamp duty from the TER. These costs would be shown separately.
• No More 5 BPS Charge: SEBI plans to remove the additional 5 bps that fund houses were allowed to charge across schemes. This charge was introduced in 2012 when the exit load system was modified and meant to cover distribution costs. The regulator has stated that this was a temporary measure and is no longer needed.
• Optional Performance-Linked TER: SEBI has introduced an optional performance-linked TER framework, which allows fund houses to adjust fees based on a scheme's performance.

• Reduction in TER for Specific Schemes: For certain funds, SEBI proposes a direct cut in their TER:

  • Index Funds and ETFs (Open-ended): TER could be reduced from 1% to 0.85%.
  • Fund of Funds (FoFs) investing in liquid schemes, index funds, or ETFs: A similar reduction is proposed.
  • FoFs investing at least 65% in equity schemes: Their TER could drop from 2.25% to 2.10%.
  • Other FoFs: A reduction from 2% to 1.85% is suggested.
  • Transparency in Fee Disclosures: The consultation paper mandates clearer TER disclosures, covering all expense heads, brokerage, exchange and regulatory fees, and statutory levies.

Impact on Stakeholders

• Investors: The proposed changes are designed to benefit investors by potentially lowering costs, increasing transparency, and improving net returns. Separating brokerage and taxes in the TER will give investors a clearer picture of investment costs.
• Asset Management Companies (AMCs): The proposals may squeeze earnings of AMCs, brokers, and other intermediaries. Centrum Institutional Research noted that the changes could raise operational costs for AMCs, as they may need to pay more for external research support or expand internal research teams to maintain research coverage and execution efficiency under tighter expense limits. To reduce the impact of removing the 5 bps charge, SEBI has suggested increasing the first two slabs of the expense ratio structure by 5 bps.
• Brokers: The reduction in maximum permissible brokerage will likely hurt broker revenues. Deepak Shenoy, founder of Capitalmind AMC, stated that the brokerage market is already highly competitive, so the pain will mostly be borne by brokers currently servicing mutual funds.

Potential Benefits for Investors

The proposed changes aim to make the mutual fund industry more investor-friendly. By reducing costs, increasing transparency, and simplifying regulations, these changes could lead to a more efficient and beneficial investment experience. Lower expenses and clearer charges could potentially increase net returns from mutual funds. With performance-based expense ratios, investors would pay higher fees only when their fund delivers superior returns, aligning their interests more closely with the fund manager's.