The Securities and Exchange Board of India (SEBI) has introduced a new proposal aimed at reducing mutual fund expenses and improving transparency in fee structures.
According to a consultation paper released on Tuesday, all fund houses will now be required to clearly disclose the complete details of charges levied on investors.
Reduction in Total Expense Ratio (TER)
SEBI has proposed a cut in the Total Expense Ratio (TER) — up to 0.15% for open-ended mutual funds and up to 0.25% for closed-end schemes.
However, brokerage, taxes, and transaction costs will be excluded from these charges and will instead be shown separately.
This proposal differs from SEBI’s 2023 framework, which had suggested including all such expenses within the TER. That earlier plan faced opposition from asset managers, who currently handle assets worth around ₹75.61 trillion (about $860.23 billion).
Stricter Rules on Brokerage and New Fee Structure
SEBI has also recommended reducing brokerage fees.
In the cash market, brokerage could drop from 12 basis points to 2 basis points.
For derivative transactions, it may be reduced from 5 basis points to 1 basis point.
Additionally, SEBI has allowed performance-linked differential fee structures, meaning asset managers can charge fees based on fund performance.
Fund houses must also ensure that any non-mutual fund business is operated as a separate entity, with distinct roles for key employees.
How Investors Will Benefit
Lower mutual fund fees will directly help investors save more.
For example, if an investor puts ₹10 lakh in a mutual fund with a current TER of 1.75%, a reduction of 0.15% to 0.25% would mean:
₹1,500 saved per ₹10 lakh (0.15% reduction)
₹2,500 saved per ₹10 lakh (0.25% reduction)
Though the savings seem small, over 15–20 years, compounding could add up to an extra ₹50,000 to ₹1 lakh in returns.
Separately showing brokerage, taxes, and transaction costs will give investors a clear view of the actual expenses, leaving no room for hidden charges.
The performance-linked fee model also ensures that fund managers earn more only when investors profit, aligning their interests.
Analysts’ Take
Market experts believe these proposals could pressure AMC (Asset Management Company) stocks in the short term, as lower fees may reduce revenues and margins.
However, in the long run, the move will greatly benefit investors by promoting transparency, fairness, and accountability.
The performance-linked fee model will motivate fund managers to deliver better returns, while enhancing investor trust and governance across the mutual fund industry.
