Sebi’s mutual fund fee overhaul may pressure smaller, newer AMCs, say experts

The Securities and Exchange Board of India (Sebi) has proposed a major revamp of mutual fund fee structures aimed at cutting costs for investors and improving transparency. While the move has been welcomed as a positive step for investor protection, experts caution that it could put smaller and newer asset management companies (AMCs) under strain, particularly in maintaining distributor pay-outs and marketing operations.

The proposed changes, outlined in Sebi’s consultation paper, include reducing the base expense ratio for open-ended equity schemes by 15 basis points (bps) and for close-ended equity schemes by 25 bps. Sebi also plans to remove an additional 5 bps charge introduced in 2012, which fund houses were allowed to levy across schemes. This revision is designed to ensure that investors—not intermediaries—benefit from the sector’s economies of scale.

However, the regulator also recognises that smaller fund houses could face revenue pressure due to lower fee limits. To offset part of this impact, Sebi has proposed increasing the first two slabs of the expense ratio, covering smaller AUM brackets, by 5 bps. This minor adjustment, the regulator said, is intended to “compensate AMCs operating smaller funds.”

Despite this buffer, analysts believe the challenge for smaller players will remain significant. With tighter margins, newer AMCs may find it harder to fund distributor commissions, investor acquisition, and brand visibility, especially as large fund houses can rely on scale and established networks.

“Smaller and newer AMCs may face challenges in sustaining distributor pay-outs and marketing efforts,” Puneet Singhania, Director of Master Trust Group, adding that this could lead to industry consolidation, where well-capitalised AMCs expand their market share. Smaller funds might have to rethink distribution strategies—shifting toward digital platforms and direct investor channels—to stay competitive.

He added that Sebi’s initiative will ultimately benefit investors by reducing costs and aligning India with global standards of transparency and cost-efficiency. “Lower expenses will directly enhance net returns, but the move will compel fund houses—especially smaller ones—to optimise costs and adopt leaner distribution models,” he said.

Sandeep Bagla, CEO of Trust Mutual Fund, estimated that Sebi’s recommendations could lower fund expenses by 15–20 bps. “While investors stand to gain, AMCs will earn less and may reduce distributor commissions. Larger players with strong AUMs can absorb the impact better than emerging fund houses,” he said.

Sebi’s proposal also targets brokerage and transaction costs, recommending that the current limits—12 bps for cash market trades and 5 bps for derivatives—be reduced to 2 bps and 1 bp, respectively. The regulator flagged concerns of double-charging for research expenses under both fund management fees and brokerage costs.

Additionally, AMCs will be required to provide comprehensive TER breakdowns, detailing every cost component. This increased transparency will help investors make informed decisions and compare fund efficiency more easily.

While the proposals may squeeze AMC margins in the short term, experts believe they mark an important structural evolution for India’s ₹75.6 lakh crore mutual fund industry. The focus on transparency, cost rationalisation, and investor protection is expected to foster long-term trust, even if the transition period proves challenging for smaller players.

Ultimately, Sebi’s reforms aim to balance investor interests with industry viability, ensuring that cost efficiencies do not come at the expense of healthy competition. As one expert summed up, “The coming phase will separate the efficient from the rest—forcing fund houses to innovate, digitise, and deliver more value with less.”