SEBI recalibrates mutual fund expense structure after extensive industry consultation
The Securities and Exchange Board of India’s final decision on mutual fund expense ratios has been largely welcomed by asset management companies and brokerages, as the regulator opted for a calibrated reset rather than the sharper cuts proposed earlier. The move follows months of industry consultation and aims to balance investor cost efficiency with the commercial viability of fund houses and intermediaries.
At its board meeting in Mumbai, SEBI approved a reduction in mutual fund expenses of up to 15 basis points, but moderated the effective cut to around 10 basis points across most assets under management slabs. Market participants say this approach offers cost relief to investors without materially disrupting fund economics.
Base Expense Ratio replaces TER to improve transparency for investors
One of the most significant changes is the replacement of the Total Expense Ratio with a new Base Expense Ratio framework. Under this structure, external levies such as GST, stamp duty, Securities Transaction Tax, Commodity Transaction Tax and other statutory charges will be kept outside the BER and disclosed separately.
This means the BER will now reflect only fund-level costs such as management fees, distribution commissions and registrar and transfer agent charges. Industry executives believe this separation enhances transparency and allows investors to better understand the true cost of fund management.
“Overall, there are some slab-level changes in the base expense ratio, with taxes kept outside, so it’s not materially significant for fund houses, but it brings in a lot of transparency and clarity for all stakeholders,” said DP Singh, Joint MD and CEO of SBI Mutual Fund. “We are thankful to the regulators for the same.”
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Revised caps bring moderate cuts across equity and debt schemes
Under the revised framework, the maximum expense ratio for open-ended equity schemes with assets below ₹500 crore has been reduced from 2.25 percent to 2.10 percent. For debt schemes in the same category, the cap has been lowered from 2.00 percent to 1.85 percent.
Overall, active equity funds will now operate within an expense range of 0.95 percent to 2.10 percent, while fixed income funds will be capped between 0.70 percent and 1.85 percent, depending on AUM size. For very large schemes managing more than ₹50,000 crore, the caps have been set at 0.95 percent for equity and 0.70 percent for debt funds.
Compared with the consultation paper, which proposed a more aggressive and progressive step-down beyond higher AUM slabs, the final framework reflects moderation. The proposed reductions of around 15 basis points have been softened to roughly 10 basis points, easing concerns raised by AMCs and distributors during consultations.
Passive and close-ended funds see tighter but predictable limits
SEBI has also lowered the Base Expense Ratio for passive products such as index funds and exchange-traded funds from 1 percent to 0.90 percent. Close-ended equity funds will now be capped at 1 percent, while close-ended debt funds can charge up to 0.80 percent.
For funds of funds, the revised limits stand at 0.90 percent for index FoFs, 2.10 percent for equity FoFs and 1.85 percent for other FoFs. In another investor-friendly move, AMCs will no longer be allowed to charge an additional 5 basis points in lieu of exit loads, further tightening overall cost structures.
Brokerage cap reset offers relief to distributors and intermediaries
Alongside expense reforms, SEBI has recalibrated brokerage caps, a move that has come as a relief to market intermediaries. For cash market transactions, the earlier brokerage cap of 12 basis points inclusive of statutory levies has been reset to 6 basis points, exclusive of levies. This is significantly higher than the 2 basis points proposed in the consultation paper.
For derivative transactions, the cap has been reduced to 2 basis points exclusive of levies, compared with the earlier effective level of 3.89 basis points net of levies. Industry participants say these changes better reflect prevailing market economics and transaction costs.
Singh welcomed the decision, noting that “the brokerage caps have been rationalised after discussions and are more aligned with market realities.”
Industry feedback shapes a more balanced regulatory outcome
The final framework reflects extensive engagement between the regulator and industry stakeholders. During the consultation phase, brokerages and fund houses had raised concerns about the combined impact of lower expenses, reduced brokerage caps and removal of exit-load-linked charges.
Market participants noted that SEBI’s decision to moderate the cuts and remove exit-load-related charges demonstrates a consultative approach. The revised structure, they say, protects distributor viability while still delivering meaningful cost efficiency to investors over the long term.
Broader governance and disclosure changes add to reform agenda
Beyond expenses and brokerage, SEBI has announced a series of governance-related changes. Asset management companies have been asked to reorganise and clearly define the roles and responsibilities of trustees and asset managers. The regulator has also removed the requirement to publish scheme changes in newspapers, subject to adequate website disclosures.
In addition, regulations for real estate mutual funds have been discontinued due to the absence of product launches, and AMCs will now be allowed to send annual reports and abridged summaries digitally, reducing compliance costs and improving efficiency.
A calibrated reform that balances investor interest and industry sustainability
Overall, SEBI’s revised expense and brokerage framework signals a measured regulatory approach. While investors benefit from lower and clearer costs, fund houses and intermediaries gain predictability and relief from sharper cuts proposed earlier.
As the mutual fund industry continues to scale, market participants believe the emphasis on transparency, moderation and consultation will support sustainable growth, while reinforcing investor confidence in India’s capital markets.
