Fortune India Explainer: Sebi’s plan to simplify mutual fund charges may drive a shift toward passive funds

The regulator, Securities and Exchange Board of India (Sebi), has proposed a sweeping overhaul of how mutual funds charge investors, aiming to make costs more transparent and investor-friendly. The regulator’s consultation paper recommends reducing the Total Expense Ratio (TER) — the fee that covers fund management and operational costs — to ensure investors pay less while understanding charges more clearly.

According to SEBI, the move could significantly cut investment costs and promote greater transparency in the ₹50-trillion mutual fund sector. However, the reform poses immediate challenges for fund houses. Asset Management Companies (AMCs) are likely to face pressure on profitability as their fee income declines.

Speaking to Fortune India, Santosh Meena, Head of Research at Swastika Investmart, said larger fund houses will bear the brunt of the change due to their higher asset bases. While SEBI has offered smaller schemes a 5-basis-point TER relief, Meena noted that this will offer only limited respite to AMCs.

Q. Do lower TER limits risk reduce the quality of fund management or research, especially for actively managed schemes?

A. There is a real risk for active schemes, as reduced revenues (lower TERs and lower brokerage limits) will force AMCs to cut costs, potentially leading to lower spending on proprietary research and on experienced fund management talent. This pressure will be most acute for schemes that already struggle to outperform their benchmarks. The industry may consolidate, favouring only those active managers who can justify their fees with superior, net-of-cost performance.