Proposed brokerage fee cap may be the biggest jolt for mutual funds in Sebi’s regulatory overhaul

Capital market regulator Sebi’s proposal to sharply reduce brokerage and transaction cost for mutual funds is emerging as the most consequential – and contentious – reform in its plan to tweak regulations in pursuit of ease of business and transparency.

The consultation paper released on October 28 has proposed that mutual funds will be allowed to charge a maximum of only 0.02 percent of equity trades and 0.01 percent of derivatives trades outside the Total Expense Ratio (TER). Any excess brokerage must be within the TER, a move that is expected to put pressure on asset managers and hit institutional broker revenue. Read More

Deepak Shenoy, founder of Capitalmind AMC posted on social media that the move would prevent investors from being “double-charged” for research. “Research should come from AMC management fees, not from investors’ pockets again through brokerage,” he said. “If an AMC pays more than 2 bps for equities or 1 bp for derivatives, the excess must come from within the TER. It’s a good move – it will push transaction costs lower and bring more transparency.”

Read More: HDFC AMC, Nuvama, Motilal Oswal, other capital market stocks fall as Sebi proposes fee changes

However, Shenoy has warned of downstream repercussions. “Brokerage limits are being cut (from 12 bps to 2 bps for cash market and 5 bps to 1 bps for derivative transactions), so institutional brokers could see a sharp fall in income if this goes through.”

Industry executives are expecting a pushback from both AMCs and brokerages, as it may tighten margins. Sebi has sought feedback on the draft regulations from stakeholders by November 17, 2025.

TER Simplification: Margins Likely to Feel the Squeeze
Beyond transaction costs, Sebi has proposed a leaner TER framework, restricting the ratio to only scheme-related expenses such as management fee, brokerage, custodial and regulatory charges, while excluding statutory levies like GST, STT and stamp duty. The additional 5 bps linked to exit loads will also be removed.

Sebi said its objective is to make fund costs “simpler, fairer and more transparent.” Industry estimates suggest many schemes may see their TERs fall by 15-20 bps, benefiting retail investors directly.

Sandeep Bagla, CEO of Trust Mutual Fund said, “The expectation is that the total expense ratio will come down by about 15-20 bps.” Bagla added that some costs don’t vanish, they only move. “Trading charges and statutory levies may now fall outside the TER. While it will appear lower, those costs will still exist.” AMCs typically operate with 30–35 bps profit margins, said Bagla, implying that a TER reduction could ultimately result in lower distributor payouts.

In contrast, Akhil Chaturvedi, Chief Business Officer at Motilal Oswal AMC said the overall impact could be largely revenue-neutral, though passive funds may feel a slightly bigger hit of 7-8 bps.

Distributor Strain on the Horizon
For distributors – especially those in smaller towns – the changes may sharpen existing challenges. Sachin Jain, Managing Partner at Scripbox said Sebi’s proposal corrects a long-standing GST anomaly, but bring operational burden. “A Rs 100 crore AUM distributor might earn Rs 40–50 lakh a year — before salaries, offices, marketing and compliance. It’s not lucrative unless other income streams are added, which can dilute advisory focus.”

He warned that “repeated cost rationalisation tends to dampen distributor enthusiasm,” shifting push toward higher-commission products like PMS, AIFs and REITs.

Performance-Linked TER: Progressive But Tricky
Sebi has also proposed an optional performance-linked TER, allowing AMC’s fee to vary depending on the outperformance against the benchmark. Experts said the concept is progressive, but complex to operationalise for a mass-retail product.

“It’s hard to design and communicate differentiated fee structures for millions of investors,” Bagla said.

Sachin Jain added that it may encourage risk-taking, requiring oversight.

A Digital-First, More Transparent Regime
Overall, the paper sets the stage for a major governance reset, including paperless disclosures, unified rules and tighter expense accountability in India’s Rs 75.6 lakh crore mutual fund industry.

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