The SEBI consultation paper on reduction in total expense ratio of mutual funds and cut in brokerage charges will benefit investors but reduce the profit margins of fund houses substantially, while having a negative impact on brokers.
SEBI has proposed to remove the additional 5 basis points (bps) that mutual fund houses were allowed to charge across their schemes.
However, SEBI has proposed a new 5 bps upward revision in the first two slabs of the expense ratio of active open-ended schemes to ensure there is a balance if the additional 5 bps is removed.
MFs levy expenses on the basis of assets under management. For AUM upto ₹500 crore, MFs can charge 2.5 per cent for active funds and 2 per cent for passive funds and between ₹500 crore and ₹700 crore of AUM the TER is fixed at 2 per cent and 1.75 per cent for passive funds. Similarly, the TER reduces across 3 slabs as AUM grows.
The additional proposed expense of 5 bps in the TER for the first slabs of AUM will help smaller fund houses as they build the business.
Jefferies expects the move to lower TER, removal of exit load charges and lower brokerage fees will together reduce profit before tax by 8-10 per cent for major listed companies such as HDFC AMC and Nippon India AMC in FY27.
Moreover, the proposal to slash brokerage fees on cash market transactions will hit institutional brokers such as 360 ONE and Nuvama, it said.
Puneet Singhania, Director, Master Trust Group, said while the move may exert pressure on fund houses—particularly large AMCs with substantial AUMs — by compressing profit margins, it encourages greater operational discipline and transparency. Smaller and newer AMCs may face challenges in sustaining distributor pay-outs and marketing efforts. However, the overall reform aligns the industry with global best practices, ensuring a more investor-centric and competitive landscape, he said.
The impact of reduction in brokerage charges will be minimal and can be reworked because the volume of transactions has also gone up manifold, he said.
DP Singh, Deputy Managing Director, SBI Funds Management, said the consultation paper is investor-centric and the proposed cut in TER will have a marginal impact as the AUM of industry has also gone up substantially ever since it was last revised.
More transparency
The consultation paper issued by market regulator SEBI may to lead to mutual funds reducing the total expense ratio they charge on the funds by 15-20 basis points.
It will also lower the brokerage paid for cash equity trades from 12 bps to 2 bps. The removal of statutory levies from TER will bring more transparency on the charges levied by the fund houses.
Sandeep Bagla, CEO, TRUST Mutual Fund, said the proposal appears slightly positive for the smaller fund houses as the proportionate of fees charged and commission paid will decrease more for larger schemes and hence impact bigger fund houses more.
While investors will benefit as their returns will go up, he said in all probability AMCs will minimise the impact of lower charges by reducing the distributors commissions.
SEBI has also proposed a voluntary performance-linked TER mechanism which will enable AMCs to balance their expenses with the scheme’s performance.
Move to lower TER is a constructive step toward enhancing investor value and fostering greater cost efficiency within the mutual fund industry, said Singhania.
Lower expenses will directly improve net returns for investors, reinforcing confidence in mutual fund products as a long-term wealth creation avenue, he added.
One of the most significant proposals is the removal of the additional 5 basis points (bps) charge that mutual funds can currently levy on schemes with exit loads.
Leading global broking firm Jefferies said mutual funds are likely to seek a balancing act on SEBI proposal and may attempt to pass on 60-70 per cent of the impact with distributors and other ecosystem players.
By keeping the statutory levies such as GST and STT out of TER will allow fund houses to pass on future changes in statutory costs directly to investors, said Jefferies.
The consultation paper has also proposed operational changes, including revised disclosure norms for TER, differential expense ratios based on fund performance, and clearer segregation of non-pooled businesses.
Published on October 29, 2025
