SEBI just found where your mutual fund returns are leaking, and it's not in the TER

SEBI’s latest draft proposal to curb mutual fund brokerage costs could slash hidden investor charges—and fund managers and brokers alike will need to adapt fast, says Deepak Shenoy, CEO of Capitalmind AMC.

In a detailed post on X, Shenoy explained SEBI’s move to cap broker commissions paid by mutual funds.

Currently, mutual funds can pay up to 0.12% on equity and 0.05% on derivatives per trade as brokerage—amounts that do not count toward the Total Expense Ratio (TER). SEBI now wants to allow only 0.02% and 0.01% respectively as “pass-through” expenses. Anything beyond that must be absorbed within the TER limit.

“SEBI is saying: why should mutual funds pay higher brokerage and are allowed to charge it to investors… when the higher brokerage is for research?” Shenoy wrote. “Research of the AMC itself is what’s being paid for in management fees.”

This change could squeeze AMCs if they fail to negotiate cheaper rates. Shenoy provided a simplified model: a ₹1,000 crore fund may currently pay ₹0.9 crore in brokerage annually. Under the new rule, only ₹0.2 crore would be allowed outside TER; the remaining ₹0.7 crore must come out of the AMC’s fee share, reducing it by 7%.

“With distributors taking their cut, this could significantly reduce the take-home for AMCs—unless they push brokers to cut fees,” Shenoy noted.

This could drive a shift in AMC-broker dynamics. SEBI rules already require mutual funds to split brokerage across at least 20 brokers to avoid concentration. With the institutional brokerage space already highly competitive, Shenoy believes AMCs will find cheaper options. “The pain is likely to be borne mostly by the brokerages who currently service mutual funds,” he said.

He also pointed out that these brokerage costs are “effectively hidden” from investors today—excluded from the disclosed TER and only found buried in annual scheme reports.

In Shenoy’s view, this is a win for investors. “Most of you pay a lot lesser in brokerage today,” he said. “It’s time that us that manage mutual funds also reduce our transaction costs.”

If approved, the move would improve fee transparency, lower investor costs, and reshape how India’s ₹50 lakh crore mutual fund industry manages trading expenses.