MUMBAI: The sharp fee cuts India’s mutual fund industry had been bracing for have not materialized. Instead, the Securities and Exchange Board of India’s (Sebi) decision to dilute its earlier proposal on brokerage and expense caps has eased margin concerns for fund houses while improving transparency on expenses. These changes, however, are unlikely to meaningfully boost investor returns.
On Wednesday, the regulator capped brokerage costs for mutual funds at 6 basis points (bps) in the cash market, down from 12 bps, and at 2 bps in derivatives, compared with the current 5 bps. It also scrapped the additional 5 bps that could earlier be charged over exit loads—fees levied when investors redeem their investments. The revised provisions will take effect on 1 April 2026, providing the industry with a three-month transition window.
The final framework is far less stringent than Sebi’s October consultation paper, which had proposed slashing brokerage caps to 2 bps for cash-market trades and 1 bps for derivatives. That proposal had rattled asset management companies (AMCs) and distributors, who warned of sharp margin compression and disruption to operations.
By settling on a 6-bps cap, the regulator appears to have struck a compromise between investor protection and industry viability.
Costs, unbundled
Alongside brokerage changes, Sebi has reworked the structure of expense ratios to improve disclosure clarity.
The base expense ratio (BER) will now exclude statutory levies such as securities transaction tax, commodities transaction tax and goods and services tax. The total expense ratio (TER) will instead be disclosed as a sum of BER, brokerage, regulatory levies, and statutory charges, a move aimed at making costs more transparent and avoiding double charging.
“The important objective of this exercise was to make it (costs) transparent because the taxes and levies are subject to change over time and they should not remain embedded in the TER. In the current case, something was embedded, something was not embedded. So, there was a confusion,” Sebi chair Tuhin Kanta Pandey said during a press conference after the board meeting on Wednesday. “It is not as radical as it was proposed in the beginning”.
Fund managers said the final rules came as a relief.
“The changes in TER and brokerage limits is not a surprise. 6 bps is a good solution for all stakeholders,” said Sandeep Bagla, chief executive officer (CEO) of Trust Mutual Fund. “The timeline for implementation is comfortable. The industry has got three months to make all the changes.”
Fund houses also welcomed Sebi’s decision to implement the revised norms in one go rather than through staggered changes, saying the transition period would help them communicate the changes more effectively to investors.
The revised expense ratio framework is expected to benefit smaller mutual fund schemes more than larger ones. Funds with lower assets under management typically charge higher expense ratios to offset their limited scale.
Under the new structure, these schemes are likely to gain greater flexibility within the permitted limits, allowing them to better align costs with operational realities. The additional headroom could be used either to absorb management expenses or to raise distributor commissions, helping smaller schemes remain competitive and sustain their distribution reach.
“BER changes will affect larger schemes as it may crimp distributor commissions. For smaller schemes, the changed norms may give more headroom for increasing commissions,” said Deepak Shenoy, CEO at Capitalmind Mutual Fund. The changed rules may not boost returns for investors as they “don’t care about a 0.01% to 0.02% reduction in BER,” he said.
“I think the telescopic way of doing things is more friendly to investors and they should continue because if you are able to have a larger AUM (assets under management) and you have bulk, obviously you are able to meet with some cost more effectively because it is a percentage,” Pandey had said at a press conference on Wednesday after the Sebi board meeting.
Distributors, who were expected to bear the brunt of shrinking AMC margins under the earlier proposal, said they are preparing for short-term adjustments but see longer-term positives.
“The changes show that the regulator is keeping the investors in mind,” said Santosh Joseph, managing director and CEO of Germinate Investor Services. “The hit on margins will be compensated by long-term positive growth of the industry and the mutual fund distribution business,” he said.
Regulatory restraint
For the industry, the moderation in Sebi’s final framework matters. Legal experts cautioned against regulators directly influencing pricing.
“A modern regulator should not be setting the fee AMCs charge. They should let the market forces decide, unless for some reason the competitive forces are not working,” said Sandeep Parekh, managing partner at Finsec Law Advisors. He added that when TER was revised in 2018, Sebi had publicly explained why competitive forces were not driving down costs.
“This time, Sebi has not produced a rationale publicly,” he said, adding that while lower costs benefit investors, second-order effects such as reduced research quality or weaker distribution incentives need to be studied.
Equity markets welcomed the regulatory clarity. HDFC AMC shares rose more than 4.5% in early trade on Thursday, while Aditya Birla Sun Life AMC gained over 2%. Canara Robeco Asset Management Company jumped more than 6% following the Sebi board meeting.
“Sebi has come out with a very balanced set of regulation after a wide-ranging consultation process which is positive for the MF investors and also fund houses,” said Sundeep Sikka, executive director and CEO at Nippon Life India Asset Management and the chairman of the Association of Mutual Funds in India (Amfi).
“As an industry, it gives us the certainty as the outcome of consultation paper will help in further growth and penetration of the Mutual Fund industry,” he added.
Further clarifications on expense ratio caps and related changes are expected to be issued through a circular next year.