India’s mutual fund sector, which holds assets worth approximately ₹75.6 lakh crore, is set for an extensive regulatory overhaul. The Securities and Exchange Board of India (SEBI) has published a consultation paper suggesting a revamp of the entire mutual fund fee and expense framework. The plan seeks to make rules less complicated, more transparent, and ensure that economies of scale in the rapidly growing industry directly benefit investors.

SEBI has sought public comments on the proposals until November 17, 2025. The move is part of the regulator’s initiative to make India’s financial system more investor-friendly and cost-effective.

Important Proposed Changes:

Elimination of 5 bps “Transitory” Charge:

SEBI has proposed removing the extra 5 basis points (bps) that fund houses have been allowed to collect across schemes since 2012. Initially introduced to offset distribution costs during the phasing out of exit loads, the charge is now considered outdated.

Updating of Expense Ratio Slabs:

To mitigate potential loss of revenue from eliminating the 5 bps charge, SEBI plans to increase the first two expense ratio slabs by 5 bps. This measure aims to balance AMC profitability with investor protection.

Exclusion of Statutory Levies:

SEBI aims to exclude taxes such as STT, GST, CTT and stamp duty from the total expense ratio (TER) limit. This means future changes in government levies will be directly passed on to investors, rather than being absorbed by the AMC within the TER cap.

Reduction in Broking and Transaction Charges:

The regulator has suggested reducing broking caps to 2 bps from 12 bps for cash transactions and to 1 bp from 5 bps for derivatives. SEBI observed that investors are currently paying twice for research—once through management fees and again through brokerage charges.

Choice for Performance-Linked Fees:

SEBI has also proposed allowing AMCs to voluntarily adopt performance-linked fee structures, enabling differentiation based on returns and scheme quality.

Impact on Investors:

For investors, these proposals signal greater transparency and lower costs. Eliminating redundant fees and tightening broking ceilings are expected to reduce the TER. Furthermore, unbundling statutory charges from TER will result in clearer disclosures, simplifying cost comparisons across schemes.

However, investors could face higher expenses in the short term if government levies rise, as they would now be charged separately. In the long term, increased clarity and competition should enhance investor confidence and efficiency.

Impact on Fund Houses:

For AMCs, the proposals could tighten margins, particularly for smaller fund houses. The removal of extra basis points and reduced flexibility in broking expenses may increase operational pressures. Nonetheless, SEBI’s upward revision of expense slabs offers some relief. Larger AMCs with significant AUMs are likely to benefit from economies of scale, while smaller ones may have to restructure operations or consider mergers to stay competitive.

The option to adopt performance-based fees could also help well-managed funds highlight their value by showcasing superior returns and efficient cost structures.

Industry-Wide Implications:

• The reform is likely to redefine competition within India’s mutual fund industry.
• Cost-effectiveness will become a major differentiator.
• Consolidation is likely, with smaller funds merging or exiting the market.
• Governance and disclosure standards will be enhanced, bringing India’s regulatory structure closer to global best practices.

By simplifying cost structures, SEBI also aims to increase mutual fund penetration among retail investors who have long been wary of hidden charges.

Strategic Challenges:

Implementing these changes smoothly will require careful oversight. AMCs may attempt to route costs through alternate channels, undermining the intent of the reform. Additionally, investors might not see immediate reductions in costs due to existing distributor or broker contracts. SEBI’s challenge will be to ensure that intended savings are passed on to investors and that performance-based fee models remain transparent.

Conclusion:

SEBI’s proposed overhaul of mutual fund fee regulations is a transformative step towards investor protection and cost transparency. By eliminating the 5 bps transitory charge, reducing broking caps and separating statutory levies from the expense ratio, the regulator aims to ensure that investors directly benefit from operational efficiencies. While AMCs may face short-term margin pressures, the reforms promote greater efficiency, equitable competition and innovation in fee structures.

Over time, this shift is expected to bolster trust and participation among retail investors, strengthening India’s position as a competitive and investor-friendly mutual fund market. SEBI’s proactive approach reinforces its commitment to safeguarding investor interests while promoting sustainable sector growth. Once implemented, the revamped fee framework could pave the way for a more transparent, accountable and globally aligned mutual fund ecosystem, contributing significantly to long-term capital market development.