SEBI Moves to Slash Mutual Fund Fees, Aims to Cut Investor Costs and Increase Transparency
Market regulator Securities and Exchange Board of India (SEBI) has unveiled a comprehensive consultation paper proposing significant reductions in mutual fund expense ratios—marking the first major overhaul of mutual fund (MF) regulations in nearly three decades. The proposals aim to make investing more cost-effective for retail investors while enhancing transparency across the industry.
The proposals have sent shockwaves through the industry, with shares of major asset management companies (AMCs), including HDFC AMC, Nippon India AMC and Motilal Oswal AMC, declining over 2% following the announcement. Analysts at Jefferies estimate the changes could reduce profit before tax for AMCs by 30%-33% by 2027, while Morgan Stanley projects a 10%-23% impact on profits if cost cuts apply fully to equity schemes. However, industry voices believe margins will stabilise as the mutual fund business continues its robust growth trajectory.
For investors, even a 15-20bps (basis point) reduction in expense ratios can translate into significantly higher returns over the long term. A small reduction in fees on systematic investment plans (SIP) or lump-sum investments can result in tens of thousands of rupees in savings over the years due to the power of compounding.
The proposals offer multiple advantages: more transparent and predictable charges, better alignment of fund manager goals with investor returns, higher potential alpha from active equity funds, and stronger long-term outcomes due to lower drag on returns.
Under the new framework, SEBI plans to cut the total expense ratio (TER) charged by mutual funds substantially. Open-ended equity schemes could see TER reduced from 1.25% to 1.00%, while non-equity schemes would drop from 1.00% to 0.80%—reductions of up to 0.15% for open-ended funds and 0.25% for closed-ended funds.
Index funds and ETFs would see their TER decrease from 1% to 0.85%. Fund of funds (FoFs) investing primarily in equity will have their TER reduced from 2.25% to 2.10%, while other FoFs will see cuts from 2.00% to 1.85%. These reductions are designed to ensure that the economies of scale achieved by growing mutual funds are passed on to investors.
The regulator has proposed drastic cuts to brokerage fees that mutual funds pay for trades. Currently, funds can levy up to 12bps for cash market transactions and 5bps for derivatives. The new caps would reduce these to just 2bps and 1 basis point, respectively. This move addresses concerns about double-charging, where investors may end up paying twice for research—once as part of investment management fees and again through brokerage costs. Lower transaction charges mean more of investors’ money stays in the market, benefiting long-term compounding.
In a significant transparency measure, SEBI proposes to exclude all statutory levies—including securities transaction tax (STT), goods and services tax (GST), commodity transaction tax (CTT), and stamp duty—from the expense ratio limits. Currently, only GST on management fees is permitted above the TER limit, while other statutory charges are included within it. This change ensures that any future changes in statutory levies are directly passed on to investors without being absorbed into the capped TER, providing greater clarity on the true cost of fund management.
SEBI has introduced an optional performance-based differential expense ratio framework, allowing asset management companies to charge fees based on scheme performance. This voluntary mechanism would enable AMCs to charge higher fees only when funds deliver returns above their benchmark, better aligning fund manager incentives with investor outcomes. The detailed framework will be finalised after consultation with industry stakeholders. This marks a shift from the 2023 proposals that faced industry pushback.
The additional 5bps charge that AMCs were allowed to levy on schemes with exit loads—introduced in 2012 as a transitory measure to help recover distribution and marketing costs—will be removed entirely. However, to cushion the impact on AMC operations, the first two slabs of expense ratios for open-ended active schemes have been revised upward by 5bps. SEBI has also clarified that all pre-allotment expenses, including fund launch and marketing costs, must be borne by the AMC, trustees, or sponsors—not by investors.
To prevent conflicts of interest and cross-subsidisation, SEBI proposes amending regulations on business activity restrictions for AMCs. Fund houses engaged in activities outside mutual funds may need to operate those services through separate business units with Chinese walls and segregated key employees. These activities will face enhanced oversight from trustees and the Unit Holder Protection Committee. Any activity regulated by domestic or foreign regulators may only be undertaken through a subsidiary with prior board approval.
SEBI plans to simplify the regulatory framework substantially—one person consulted before the proposals noted that the size of mutual fund regulations could be halved. The new regulations will be written in simpler language, accompanied by clear tables that detail eligibility criteria, investment limits, and valuation norms. Fund houses will be required to make detailed disclosures of the total expense ratio with clear breakups of all relevant heads, enhancing investor understanding and comparability of schemes’ cost structures.
SEBI has invited public comments and suggestions on the draft regulations, with feedback open until 17 November 2025. For now, no action is required from mutual fund investors, and SIPs and ongoing investments can continue as usual. However, as final rules evolve, investors may want to compare expense ratios more carefully when selecting new funds, prefer funds that consistently deliver performance net of costs, and track communication from AMCs after SEBI finalizes the guidelines. The regulator will take a final call after reviewing stakeholder feedback, potentially reshaping the competitive dynamics within India’s rapidly growing Rs75.6 lakh crore asset management sector.