SEBI has released a consultation paper proposing significant changes to how expense ratios — the annual fees investors pay for mutual funds — are structured and capped.
Key proposals include:
- Lowering the base Total Expense Ratio (TER) for certain schemes (for example, open‐ended equity schemes) by up to 15 basis points. The Economic Times
- Excluding statutory levies (such as GST, STT, CTT, stamp duty) from the TER cap, meaning these taxes/levies will be charged separately to the investor rather than being bundled into the TER.
- Sharply reducing allowable brokerage/transaction costs that fund houses can pass on to investors: from 12 bps to 2 bps for cash market trades; from 5 bps to 1 bp for derivatives trades.
- Introducing the possibility of performance-linked expense ratios: fund houses may charge differentiated fees based on performance.
- Requiring clear disclosures of cost components (management fees, brokerage, statutory levies) to enhance transparency.
Why is SEBI doing this?
- To reduce costs for investors in mutual funds by leveraging the economies of scale of the industry.
- To increase transparency in how mutual funds charge fees, so investors better understand what they pay for.
- To eliminate practices such as “double charging” where fund houses might charge for research via fund management fees and again via brokerage/transaction cost.
- To standardize fee structures and possibly reduce mis-selling (e.g., when distributors push higher cost schemes). For instance, SEBI has earlier proposed uniform expense ratios across schemes of an AMC.
What are the concrete numbers / changes?
- Open-ended equity schemes: Proposed reduction in base TER by around 15 basis points.
- Closed-ended equity schemes: Proposed reduction by up to 25 basis points.
- Brokerage caps: Cash market trades from current ~12 bps down to 2 bps; derivatives trades from ~5 bps down to 1 bp.
- Statutory levies will be kept outside the TER cap.
Implications for investors
- Lower costs: Even a 0.15% (15 bps) reduction may appear small, but over long investment horizons the savings compound. (E.g., on ₹10 lakh invested at 0.15% less expense = ₹1,500 per year saved). Times Bull
- Greater transparency: Investors will get more clarity on what they’re paying — management fee vs taxes vs brokerage.
- Better alignment: With performance-linked fee options, fund houses may be more directly incentivised to perform well for investors.
- Beware: separate levies: Since statutory levies will be shown separately, the headline “expense ratio” may appear lower but actual cost to investor might include additional items. Investors should look at “Total Cost” not just TER.
Implications for fund houses / the industry
- The fund houses may see profit pressure as a result of lower fee caps and reduced brokerage pass-throughs. Indeed, the market reacted when the proposals surfaced: shares of major asset managers fell.
- AMCs will need to review cost structures, operations, and fee models to adapt.
- More competitive pressure: With lower permissible fees, differentiation may shift more to performance, service, or niche offering rather than cost advantage alone.
- Implementation details will matter: The timeline, thresholds (by AUM/scheme), grandfathering older funds etc will impact how quickly the changes are felt.
What’s next — timeline & process
- The consultation paper has been released and SEBI is seeking stakeholder comments (deadline noted in sources) before finalising rules. Public Tv English
- Once the rules are finalised, AMCs will have to adapt their schemes (existing & new) to the revised fee structure.
- Investors should keep an eye on announcements from fund houses about changes in TER, fee disclosures, scheme types, etc.
- Fund houses may also re-price or redesign schemes (especially new fund offers) based on the new norms.
Things investors should watch / ask
- When you look at a scheme, check both the headline TER and any separate statutory levies or charges.
- Compare the “Direct Plan” vs “Regular Plan” expense ratios — you’ll want the lowest cost version consistent with your risk/return objective.
- Ask: Are fees performance-linked (or likely to be)? What is the AUM slab; do smaller/specialist funds still have higher fees?
- Monitor changes: Once the new rules come in, some schemes may reduce fees or adjust structure — that could be a chance to reconsider your holdings.
- Ensure transparency: Fund houses must clearly disclose cost breakup; if you don’t see it, ask for it.
Limitations & things to keep in mind
- The proposed changes are still not final — consultation phase means modifications can happen.
- A small fee reduction may not drastically change returns by itself — performance still matters most.
- Separate levies outside TER may still add cost; so a “lower TER” doesn’t mean “zero extra cost”.
- Investors should not pick schemes solely based on cost; suitability, fund strategy, risk profile matter.
Verdict
The focus keyword “mutual fund expense ratio” captures a pivotal regulatory change underway in India. SEBI’s proposals aim to reduce costs, improve transparency, and align fund house interests with investors. For the typical investor, this is a positive development — lower fees and clearer disclosure generally work in the investor’s favour. However, fee reduction is one part of the equation; fund performance, scheme selection, investor discipline remain critical. The industry, meanwhile, faces a shift: cost-structures, disclosures, and competitive dynamics will evolve.
