Sebi Proposes Major Revamp Of Mutual Fund Fee Structure To Bring Down Costs For Investors

In a major revamp of India’s mutual fund regulatory framework, the capital markets regulator Securities and Exchange Board of India (Sebi) proposed wide-ranging changes in how fund houses operate, charge fees, and disclose expenses.

The proposals are part of Sebi’s wider plan to rewrite the Sebi (Mutual Fund) Regulations, 1996, which are being reviewed for the first time in almost three decades.

In a consultation paper released on October 28, Sebi said the review aims to ensure “simplification of regulatory language, removal of redundant provisions, enhancement of ease of understanding, and removal of ambiguities.”

Sebi has invited public comments on the proposed regulations until November 17, 2025.

India’s mutual fund industry, which manages assets of Rs 75.61 lakh crore as of September 30, 2025, is set to see major operational changes if these proposals are approved. Once implemented, the reforms would be the biggest update to India’s mutual fund rules since 1996.

Sebi To Phase Out Extra 5 Bps Expense

The biggest proposal the regulator made is to remove the additional 5 basis points (bps) that asset management companies (AMCs) are currently allowed to charge on schemes with an exit load.

In its consultation paper, Sebi said “The provision for additional expense of 5 bps allowed to the AMCs to charge the mutual fund schemes, was transitory in nature. Therefore, with an objective to rationalize cost for unitholder, this expense charged to the scheme has been removed from the draft MF Regulations.”

At present, if a mutual fund scheme levies an exit load, the AMC can add an extra 5 bps, or 0.05 per cent, to its total expense ratio (TER). This is over and above the normal management fees charged to investors.

Sebi has now proposed to remove this additional charge, saying it was always meant to be temporary and that doing so will help bring down costs for investors.

This also means that AMCs will earn slightly less revenue from those schemes, which could affect their income or operations. To cushion this, Sebi suggested increasing the first two slabs of the expense ratio for open-ended active schemes by 5 bps.

Statutory Charges To Be Kept Outside TER

Another key change proposed is that all statutory charges such as securities transaction tax (STT), goods and services tax (GST), commodity transaction tax (CTT), and stamp duty should be kept outside the TER.

“The expense ratio limits are proposed to be exclusive of statutory levy, so that any change in statutory levy in future are passed on to the investors,” the paper said. Sebi added that expense ratio limits will be revised downward to exclude GST on all expenses other than management fees.

Lower Limits On Brokerage And Transaction Costs

Sebi also proposed to tighten the cap on brokerage and transaction costs that AMCs can charge. Currently, AMCs can levy brokerage up to 0.12 per cent of the trade value in the cash market and 0.05 per cent in derivatives.

Based on its analysis, Sebi found that actual brokerage costs, especially for arbitrage funds, are far lower. To prevent investors from being charged twice for research and advisory work, the regulator said, “The brokerage charge has been revised from 12 bps to 2 bps for cash market transactions and 5 bps to 1 bps for derivative transactions to bring clarity and transparency.”

All statutory charges related to trade execution, including STT, CTT, GST, and stamp duty, will be allowed over and above these limits.

More Transparent Disclosure Of Expenses

The regulator further proposed clear and uniform disclosure of all costs that form part of the TER. “Clarity has been provided on ‘Total Expense Ratio’ which shall clearly include expense ratio (as per the limits specified) plus brokerage, exchange and regulatory fee and statutory levy,” the paper said.

In a first, the regulator has suggested introducing a differential expense ratio linked to the performance of a scheme. Sebi said, “A provision enabling expense ratio to be charged based on performance of a scheme has been introduced and same shall be voluntary for AMCs.” The framework for this will be finalised after consultation with the industry.

Simplification Of Old, Redundant Rules

Sebi said the mutual fund regulations have become “voluminous and complex” after numerous amendments since 1996. The new draft aims for “simplification of regulatory language, removal of redundant provisions, enhancement of ease of understanding, and removal of ambiguities.”

Among the operational changes, trustees will now be required to hold a minimum of four meetings a year instead of six, advertisements will no longer have to be submitted to Sebi in hard copy, and AMCs can now publish information digitally instead of in newspapers. These steps, the regulator said, will “reduce the cost of compliance for AMCs and reduce duplication of disclosures to investors.”

AMCs May Get More Business Flexibility

Sebi also proposed allowing AMCs and their subsidiaries to offer investment management and advisory services to non-broad-based funds, subject to strong oversight by trustees. The paper said this would help leverage the expertise of fund managers while ensuring that “mechanisms to prevent misuse of information obtained from mutual fund operations” are in place.