SEBI’s mutual fund expenses reset: Mutual funds have moved from the margins to the mainstream of Indian household finance. With nearly ₹80 trillion now parked in these products, the Securities and Exchange Board of India (SEBI) has decided it is time to rethink how costs are presented—and who is accountable for them. Its decision to replace the familiar total expense ratio (TER) with a base expense ratio (BER) from April 1 marks the most consequential overhaul of the mutual fund cost framework in three decades.
This is not merely a technical tweak. It reflects a regulator responding to scale, sophistication, and rising scrutiny. India’s mutual fund rules were designed for a smaller, distributor-led industry. Today, technology-driven SIPs, direct plans, and a more cost-aware retail investor base demand a cleaner separation between what fund managers earn and what the market itself charges.
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Why SEBI scrapped the TER
For years, the TER bundled together two very different costs. One was the asset management company’s (AMC) fee—the price of portfolio management, research, distribution, and administration. The other consisted of statutory and transactional levies such as brokerage, securities transaction tax, stamp duty, and exchange charges.
The problem was not the level of costs alone, but opacity. Investors could see the final TER but could not easily tell how much reflected managerial skill and how much was simply the cost of participating in the market. By introducing the BER, SEBI has forced a separation. The AMC’s charge now stands alone, while all pass-through costs must be disclosed separately. Accountability, not just disclosure, is the intent.
Scale now comes with sharper caps
SEBI has paired transparency with tougher ceilings. Under the new framework, BER caps fall sharply as assets rise. For open-ended equity schemes, the ceiling drops from 2.10% for funds up to ₹500 crore to 0.95% for schemes above ₹50,000 crore. Non-equity schemes face caps ranging from 1.85% to 0.70% across similar slabs. Close-ended schemes have even lower limits.
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The signal is clear: size should bring efficiency, and investors should share in the economies of scale enjoyed by large funds. This matters because the industry is no longer niche. Systematic investment plans now account for more than ₹20,000 crore of monthly inflows, according to AMFI data, turning expense discipline into a household wealth issue rather than a back-office concern.
What this framework quietly reshapes is the economics of distribution. For years, TERs implicitly cross-subsidised commissions, especially in smaller towns where acquisition costs are higher and ticket sizes lower. By tightening AMC margins and isolating fees more clearly, SEBI is forcing fund houses to re-examine how they pay for reach. The likely outcome is not an abrupt retreat from B30 markets, but a gradual tilt toward lower-cost digital distribution and a sharper push for direct plans. Smaller independent financial advisers may feel the pressure sooner than large platforms with scale and technology.
Mutual fund expenses reset
When SEBI first floated the proposal, markets reacted nervously. Shares of listed asset management companies fell on fears of margin compression in a business where distribution costs remain high and competition is intensifying. The regulator responded with a recalibration. By excluding pass-through costs from the BER instead of squeezing them within the cap, SEBI softened the immediate revenue impact on AMCs while preserving the core transparency objective. SEBI chairperson Tuhin Kanta Pandey described the final framework as a middle path.
Equally instructive is what SEBI chose not to pursue. The regulator dropped its proposal to unbundle research and broking charges, a reform inspired by Europe’s MiFID II regime. While unbundling promised efficiency in theory, it ended up shrinking research coverage of smaller companies in Europe, with adverse consequences for price discovery. SEBI’s retreat here signals a willingness to learn from global experience rather than import reforms mechanically.
Brokerage, exchanges, and first-level regulation
Brokerage, however, has not escaped scrutiny. SEBI has tightened brokerage caps across cash and derivatives markets. In the cash segment, the ceiling (excluding statutory levies) has been reduced to 6 basis points from an effective 8.59 basis points earlier. In derivatives, the cap has been halved to 2 basis points. These moves will squeeze intermediaries at the margin but reinforce a broader push to compress costs where technology and scale have already lowered execution expenses.
The mutual fund changes sit within a wider clean-up. SEBI has approved a comprehensive revamp of regulations governing mutual funds and stockbrokers—many of them nearly 30 years old—by deleting obsolete provisions and merging overlapping ones. Stock exchanges will now shoulder greater responsibility as first-level regulators, a shift that many analysts see as a sign of institutional maturation.
For investors, the question is whether this transparency translates into better outcomes. Over long holding periods, even modest reductions in expenses compound meaningfully. SEBI’s own studies have repeatedly shown that lower-cost schemes, especially in large-cap equities and debt, tend to deliver superior net returns over time. By making AMC charges more visible and comparable, the BER framework strengthens competitive pressure in a way that should, over time, tilt flows toward more cost-efficient funds rather than merely cheaper-looking ones.
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Disclosure, IPOs, and unresolved questions
The reform package also extends beyond mutual funds. SEBI has approved a new framework for handling locked-in and pledged shares at the IPO stage to reduce uncertainty. Retail investors will get simpler, more accessible disclosures, including QR-code based access to prospectuses and abridged documents that foreground key risks instead of burying them in fine print. Incentives for retail participation in public debt issues and expanded powers for credit rating agencies to rate unlisted instruments are meant to deepen capital markets beyond equities.
Not all proposals, however, have moved forward. SEBI has deferred a decision on implementing recommendations of a high-level committee on conflicts of interest within the regulator itself, after staff raised concerns over privacy and asset disclosures. That unresolved issue sits uneasily alongside the regulator’s push for greater transparency elsewhere.
One structural consequence deserves attention. Clearer fee disclosure and sharper caps are likely to accelerate the shift toward passive products. Index funds and ETFs already operate at a cost advantage, and the BER framework makes that advantage harder to ignore. Over time, this could compress fees across active funds, sharpen performance scrutiny, and push weaker products out. That may not be comfortable for the industry, but it is consistent with the direction of a maturing market.
Taken together, the latest overhaul signals a shift in regulatory philosophy—from accumulating rules to rationalising them. Whether the new balance between investor protection and industry viability holds will only become clear over time. But the direction is unmistakable. In an industry that now sits at the heart of household finance, SEBI is insisting that investors know, with precision, what they are paying for—and who is being paid.