Market regulator SEBI on Wednesday approved several important changes to mutual fund regulations with the aim of improving transparency and making rules clearer for investors and fund houses.
These changes mainly focus on the expense ratio structure and brokerage fee limits. According to SEBI, the proposals are designed to reduce unnecessary duplication, simplify compliance, and bring better regulatory clarity across the mutual fund industry.
SEBI Chairman Tuhin Kant Pandey said that these decisions were taken during the board meeting and are expected to benefit investors by making costs more transparent and rational.
Changes in Expense Ratio Framework
One of the major decisions approved by SEBI is related to how expense ratios are calculated. Under the new proposal, all statutory charges will be excluded from the expense ratio limit.
These statutory charges include Securities Transaction Tax (STT), Goods and Services Tax (GST), Commodity Transaction Tax (CTT), and stamp duty.
In addition to this, existing expenses related to brokerage, exchange fees, and regulatory charges will also be excluded from the expense ratio limit.
At present, all statutory charges—except GST on management fees—are included within the Total Expense Ratio (TER) limit applicable to mutual fund schemes.
Under the revised framework, the expense ratio limit will be renamed as the “Basic Expense Ratio.” This change clearly separates fund management costs from government-imposed statutory charges.
The new structure ensures that any future increase or decrease in statutory charges will be passed on directly to investors, instead of being adjusted within the expense ratio limit.
This move is expected to make cost disclosures more transparent and easier for investors to understand.
Reduction in Fees and Investor-Friendly Measures
SEBI also decided to remove the additional five basis points (bps) fee that asset management companies (AMCs) were earlier allowed to charge on mutual fund schemes.
This step has been taken to rationalize costs and reduce the financial burden on unitholders.
To further protect investor interests and ensure that investors are not charged multiple times for the same service, SEBI has reduced brokerage fee limits. For cash market transactions, brokerage fees have been lowered from 0.12% to 0.06%.
For derivative transactions, the brokerage fee limit has been reduced from 0.05% to 0.02%. These reductions are expected to directly lower transaction-related costs for mutual fund investors.
Performance-Linked Expense Ratio Option
In another important move, SEBI has introduced a provision that allows expense ratios to be linked to the performance of mutual fund schemes.
This feature will be voluntary for AMCs. If adopted, it would align fund expenses more closely with the returns delivered to investors, encouraging better performance while maintaining fairness in cost structures.
Overall, these regulatory changes are aimed at making mutual fund expenses more transparent, investor-friendly, and aligned with global best practices, while also simplifying compliance for fund houses.