The Securities and Exchange Board of India (SEBI) has proposed changes to mutual fund fee structures, which include adjustments to the total expense ratio (TER) and brokerage fees, aiming to benefit investors while potentially diminishing profit margins for fund houses and impacting brokers.
In a consultation paper released on Tuesday, SEBI suggested eliminating the extra 5 basis points (bps) that mutual fund houses were previously permitted to charge across their schemes. The TER is deducted from assets under management (AUM) to cover management and operational expenses, varying by the size of the AUM.
A note from brokerage firm Jefferies highlighted that the removal of this additional 5 bps allowance would directly impact asset management company (AMC) margins. This charge had served as a steady revenue source for equity schemes, and its withdrawal is expected to noticeably affect earnings. Jefferies anticipates that the combined effects of lowering the TER, eliminating exit-load charges, and reducing brokerage fees could lower profit before tax by 8-10% for major publicly listed companies like HDFC AMC and Nippon India AMC in the fiscal year 2027.
However, smaller funds may experience minimal impact due to SEBI’s proposal for a new 5 bps upward revision in the TER for the first two slabs of active open-ended schemes. Mutual funds charge fees based on AUM; for AUM up to ₹500 crore, they can charge 2.5% for active funds and 2% for passive ones. Between ₹500 crore and ₹700 crore, the TER is set at 2% for active funds and 1.75% for passive funds, decreasing further as AUM increases.
Puneet Singhania, Director of Master Trust Group, noted that while larger AMCs may face pressure due to shrinking profit margins, the changes could foster greater operational discipline and transparency. He mentioned that smaller and newer AMCs might struggle to sustain distributor pay-outs and marketing initiatives; nonetheless, the reforms align the industry with global best practices, promoting a more investor-centric and competitive market.
DP Singh, Deputy Managing Director of SBI Funds Management, described the consultation paper as investor-focused, asserting that the anticipated reduction in TER would have a minimal impact because the industry’s AUM has significantly increased since the last revision.
Increased Transparency
SEBI’s consultation paper could lead to a reduction of 15-20 bps in the total expense ratios charged by mutual funds. It also aims to lower brokerage fees for cash equity trades from 12 bps to 2 bps. Excluding statutory levies from the TER is expected to enhance transparency regarding the fees levied by fund houses.
Sandeep Bagla, CEO of TRUST Mutual Fund, suggested that the proposal might benefit smaller fund houses since the ratio of fees charged to commissions paid will decrease more significantly for larger schemes, thereby impacting bigger fund houses more adversely. While investors are likely to see improved returns due to fee reductions, he speculated that AMCs might offset the impact by lowering distributor commissions.
Additionally, SEBI has proposed a voluntary performance-linked TER mechanism that will allow AMCs to balance expenses against a scheme’s performance.
According to Singhania, the decision to lower TER is a constructive measure aimed at enhancing investor value and promoting cost efficiency within the mutual fund industry. Reduced expenses are expected to lead to improved net returns for investors, reinforcing their confidence in mutual funds as a viable long-term wealth creation avenue.
Jefferies noted that mutual funds are likely to seek a balance in response to SEBI’s proposal, potentially passing on 60-70% of the financial impact to distributors and other market participants.
By excluding statutory levies like GST and STT from the TER, fund houses can directly pass future shifts in statutory costs to investors, according to Jefferies. The consultation paper also suggests operational changes, including improved disclosure norms for TER, differential expense ratios based on fund performance, and clearer segregation of non-pooled businesses.
Published on October 29, 2025
