The Securities and Exchange Board of India (SEBI) has rolled out a consultation paper proposing a sweeping overhaul of the mutual fund fee framework in India. The reforms are designed to make mutual fund charges clearer, fairer and more beneficial for unit‑holders. By revamping how fees are structured, disclosed and capped, SEBI aims to strengthen investor protection and align the mutual fund industry with evolving global standards.
What Are the Key Proposals?
The draft framework includes several major changes.
- Excluding taxes and government levies from TER: Charges like Securities Transaction Tax (STT), Goods & Services Tax (GST) and stamp duty will no longer be baked into the fund’s Total Expense Ratio (TER). Instead, they will be shown separately and charged directly to investors.
- Removing the additional 5 basis points (bps) expense for AMCs: A temporary addition that asset management companies (AMCs) have been charging on assets under management (AUM) is proposed to be removed.
- Offsetting the removal via 5 bps increase in base TER slabs: Specifically for open‑ended active schemes, the first two slabs of TER may be raised by 5 bps to balance out the change.
- Introducing optional performance‑linked TER framework: AMCs may optionally charge higher fees if performance meets predefined benchmarks—giving more flexibility, but also linking fee to performance.
- Tighter brokerage & transaction cost caps: For cash market transactions, the brokerage cap is proposed to fall from 12 bps to 2 bps; for derivatives from 5 bps to 1 bps.
- Clearer disclosure and transparency: Funds must clearly separate out cost components, emphasise what the investor is paying for, and improve comparability across schemes.
- Public commentary invited: SEBI has invited feedback on the draft until 17 November 2025.
What Should Investors and AMCs Do?
- Investors should monitor how their current mutual fund schemes amend their fee disclosures and TERs post‑implementation; check if performance‑linked fee models are introduced and whether they suit their risk‑return profile.
- AMCs should evaluate the cost impact of the changes, prepare for transparency and governance enhancements, and revisit the business model around TER, performance fees and fund operations.
- Distributors and advisors need to update their communication and advice frameworks to reflect new fee structures, ensuring clients understand changes.
- Regulators and industry bodies should work on clear implementation guidelines, ensure investor education and manage transition risks.