Investing Costs Redefined by SEBI

India’s Mutual Fund industry has grown 83 times in two decades, but at what cost? SEBI’s landmark consultation paper aims to fix that imbalance through lower expense ratios, transparent cost disclosure, and performance-based incentives. Here’s how this reform could reshape fund economics and compound long-term investor wealth[EasyDNNnews:PaidContentStart]

The Indian capital market regulator, Securities and Exchange Board of India (SEBI), has drawn a clear line in the sand, unveiling a consultation paper that proposes a fundamental overhaul of the nation's mutual fund regulations. These landmark reforms, the most significant in nearly three decades, signal a powerful shift in regulatory focus from mere asset gathering to prioritising investor outcomes. Poised to directly impact India’s burgeoning mutual fund investor base of over four crore people and an industry managing assets worth more than ₹75 lakh crore, these changes represent a watershed moment.

Here’s the chart showing Indian Mutual Fund Industry AUM Growth (2001–September 2025): The total AUM has grown from ₹0.91 lakh crore in 2001 to ₹75.36 lakh crore in September 2025, reflecting a CAGR of roughly 19.56 per cent over this 25-year period.

In the following story, we provide a comprehensive analysis of SEBI's proposals, decoding the planned overhaul of expense ratios and explaining what these changes mean for portfolio returns, cost structures, and the future of mutual fund investing in India.

The Driving Force: Why SEBI is Reengineering a 29-Year-Old Framework
The strategic decision by the regulator to modernise regulations is a direct response to the rapid evolution and immense scale of rise in India's mutual fund industry. As shown in the above chart, industry asset has grown at an annualised rate of more than 19 per cent. The sheer scale of rise and the size of the industry underscores the need for reform. As of the latest regulatory filings on September 30, 2024, the Assets Under Management (AUM) for the Indian mutual fund industry stood at a staggering ₹75.36 lakh crore, spread across 25.19 crore investor accounts (folios) and not unique investors. This explosive growth necessitates a regulatory framework that is both robust and agile.

Recognising that numerous amendments over 29 years had made the 1996 regulations complex and voluminous, SEBI has undertaken this comprehensive review as a proactive measure designed to future-proof the industry. According to its consultation paper, the goals are to simplify regulatory language, remove redundant or outdated provisions such as those for capital protection-oriented schemes and Real Estate mutual funds, enhance the ease of understanding and compliance for all stakeholders, and significantly boost investor protection and transparency.

The most impactful of these proposed changes are centred on the Total Expense Ratio (TER), the annual fee that directly affects every investor's future returns.

Deconstructing the New TER: A Deep Dive into Your Mutual Fund Costs
The TER is one of the most critical factors impacting an investor's long-term, compounded returns. A lower TER means more of your money stays invested and working for you. SEBI's proposed overhaul of the TER structure is a pivotal move towards greater clarity, fairness, and ultimately, better outcomes for the investor.

Unbundling the Costs: Exposing What You Truly Pay For At the heart of the reform is a proposal to unbundle costs by excluding all statutory levies from the TER limits. This means charges like the Securities Transaction Tax (STT), Goods and Services Tax (GST), Commodity Transaction Tax (CTT), and Stamp Duty will no longer be embedded within the TER. Instead, they will be charged separately and disclosed clearly to investors.

This shift is akin to moving from an all-inclusive holiday package with hidden charges to an itemised bill. For the first time, investors will see precisely what they are paying the fund manager for their expertise versus what they are paying the government in taxes. This provides an unambiguous view of expenses, allowing investors to distinguish between the fund's operational costs and government-mandated taxes.

The End of an Era: Eliminating the 5 bps Exit Load Charge SEBI has proposed eliminating the additional 5 basis points (0.05 per cent) expense that Asset Management Companies (AMCs) were permitted to charge on schemes that levy an exit load. This 'transitory' charge was introduced in 2012 at 20 bps and later reduced to 5 bps in 2018. By removing this provision, SEBI aims to directly reduce the cost of investing. For investors in schemes with exit loads, this means they will no longer pay this extra fee, leading to direct savings.

What the New Slabs Mean for Different Fund Types
SEBI has also proposed specific reductions in the TER slabs for various fund categories to pass on the benefits of economies of scale to investors. The key proposed reductions include:
■ For open-ended Index Funds and ETFs: Reduced from 1 per cent to 0.85 per cent.
■ For Fund of Funds (FoFs) investing in liquid schemes, index funds, or ETFs: A similar reduction is proposed.
■ For FoFs investing at least 65 per cent in equityschemes: Reduced from 2.25 per cent to 2.10 per cent.
■ For other FoFs: Reduced from 2 per cent to 1.85 per cent.

Beyond redefining what's inside the TER, SEBI is also targeting another significant, often hidden, cost that erodes returns: brokerage fees.

Slashing the Hidden Drag: The Radical Cut in Brokerage Fees
Brokerage and transaction costs, while necessary, can be a source of 'hidden costs' that diminish investment returns. SEBI's proposal to drastically cut brokerage caps is a direct regulatory challenge to the widespread industry practice of bundling research and execution services—a system that has historically favoured large, institutional brokerages and led to potential conflicts of interest.

The proposed cuts to the brokerage caps are sharp and specific: a reduction from 12 basis points (0.12 per cent) down to 2 basis points (0.02 per cent) for cash market transactions, and from 5 basis points (0.05 per cent) down to 1 basis point (0.01 per cent) for derivatives transactions. SEBI's core reasoning is that high brokerage charges were often due to bundled services, particularly research, which should be an inherent part of investment management. This practice led to investors effectively paying twice for research—once as part of the management fee and again through inflated brokerage costs. The new, lower caps are designed to cover execution-only costs.

The benefit of lower transaction costs is direct and powerful. For a young investor starting a 25-year SIP, this seemingly tiny saving on brokerage does not just add up—it compounds into a sum large enough to fund several years of retirement. By ensuring a greater portion of capital remains invested, SEBI is significantly enhancing the power of compounding for the long-term retail investor.

This focus on fair pricing extends beyond operational costs to a revolutionary proposal to link fees directly to fund performance.

The Silent Wealth Multiplier: How a Lower TER Can Transform Long-Term Returns
One of the most reliable ways to enhance wealth lies not in what you earn, but in what you save, on costs. The TER, often an overlooked line in a mutual fund’s fact sheet, can quietly erode or enhance long-term wealth.

To demonstrate its impact, we ran a simple 25-year SIP experiment — ₹10,000 invested monthly, with an assumed gross annual return of 10 per cent. We compared two scenarios: one with a normal TER (1 per cent) and another with a reduced TER (0.75 per cent). The difference — just 0.25 per cent, or 25 basis points — might seem trivial in a single year. But over 25 years, this small saving compounded into something remarkable.

At the end of the period, the investor under the normal TER plan would have accumulated approximately ₹1.18 crore, while the reduced TER investor would stand at ₹1.23 crore — a difference of ₹4.7 lakh without taking an ounce of extra risk. This is almost 15 per cent of the invested amount. This outcome underscores the compounding effect of cost efficiency: the money saved from lower fees continues to earn returns year after year, amplifying gains over time.

Our broader analysis extended the experiment across various return scenarios — from 10 per cent to 15 per cent — and TER differences ranging from 0.1 per cent to 0.7 per cent. The result was clear: the higher the investment horizon and the growth rate, the larger the gap in final wealth. At higher returns, even a small reduction in TER can lead to double-digit lakh differences in total corpus.

The takeaway for investors is simple yet profound — costs compound just like returns do. Choosing funds with a lower TER does not just improve your portfolio’s efficiency; it accelerates your journey toward financial independence. In an age where alpha is shrinking and volatility rising, TER remains one of the few controllable levers investors can pull — a quiet but powerful driver of long-term wealth.

A Paradigm Shift: Introducing Performance-Linked Fees
In a first-of-its-kind move for the Indian mutual fund industry, SEBI has proposed a framework that shifts away from a purely fixed-fee model to one that can reward superior performance.

The new, voluntary provision will allow AMCs to charge a 'performance-linked expense ratio', a strategic move that represents a major step toward aligning the interests of fund houses with those of their investors. This model directly connects an AMC's financial success to its investors' portfolio returns, as higher fees will only be earned if and when a scheme delivers returns that outperform its benchmark.

This proposal could act as a powerful incentive for fund managers to generate alpha, or benchmark-beating returns. It could also bifurcate the active management industry, creating a premium category of funds that are confident enough to link their revenue to results, making them more attractive to discerning investors. However, such a model is not without its risks; a performance-based structure could potentially encourage some fund managers to take on excessive risk in pursuit of benchmark-beating returns. The final framework will be decided after stakeholder consultations, but its introduction alone signals a new era of accountability.

Such fundamental reforms will inevitably create a new landscape with clear winners and losers across the financial industry.

The Industry Shake-Up: Winners and Losers from the Reforms
Major regulatory shifts inevitably reconfigure the competitive landscape, creating distinct impacts on different stakeholders. SEBI's proposals are no exception, with clear beneficiaries and others who will face significant pressure to adapt.

The Investor: The Unquestionable Beneficiary
Retail investors are the primary and undisputed winners of this proposed regulatory overhaul. The key benefits can be summarised as follows:
■ Greater Transparency: A clear and unbundled view of all costs — management fees, brokerage, and statutory levies — will allow for more informed decision-making.
■ Lower Expense Drag: Direct cost savings from the removal of the 5 bps charge on schemes with exit loads and the radical cuts in brokerage fees will leave more money in investors' portfolios.
■ Potential for Higher Returns: With lower costs, more capital stays invested, leading to better long-term compounding and a larger final corpus.
■ Fairer Fee Structures: The option for voluntary performance-linked fees ensures investors pay for performance, aligning fund manager incentives with their own financial goals.

Asset Management Companies: A Diverging Path
The impact on AMCs is expected to be bifurcated. Large and established AMCs could face significant margin pressure due to lower permissible costs. Analysis from one of the brokerage firms highlights the potential for this, estimating that the elimination of the additional 5 bps expense on schemes with exit loads could impact the Profit Before Tax (PBT) of major players like HDFC AMC and Nippon AMC by as much as 30-33 per cent.

In contrast, some market analysts note that these proposals could create a more level playing field. By standardising and lowering costs, it may become easier for newer and smaller fund houses to compete with industry giants.

Brokerage Firms: Facing the Squeeze
The most significant negative impact is expected to be felt by brokerage companies that handle mutual fund transactions. According to an analysis, these firms face a sharp reduction in commission income due to the drastic cuts in brokerage caps. The impact may be even more acute for foreign brokerage firms, which often rely heavily on large institutional mutual fund deals for their revenue.

With these significant changes on the horizon, it is crucial for investors to have a clear action plan to navigate the new environment effectively.

Investor Action Plan: Navigating the New Mutual Fund Landscape
The upcoming regulatory changes present a powerful opportunity for investors to become more informed, proactive, and cost-conscious in managing their investments. Here are actionable steps to take:
■ Mark Your Calendar: These are proposals, not final rules. The deadline for public comment is November 17, 2025. Monitor SEBI's final circulars to understand the definitive changes.
■ Conduct a Cost Audit: Once the new rules take effect, your fund’s expense sheet will look different. Demand thenew, unbundled TER data and benchmark it ruthlessly against peers. A previously 'cheap' fund may no longer be competitive.
■ Scrutinise New Disclosures: AMCs will be required to provide a clear and detailed break-up of all expenses. Pay close attention to these new disclosures to understand precisely where your money is going and use this newfound transparency to your advantage.
■ Assess Performance-Linked Funds: For funds that voluntarily adopt the new performance-based fee model, evaluate whether this structure aligns with your investment philosophy. It may indicate a fund manager's confidence and a strong alignment of interests with investors.

Conclusion
SEBI's proposed overhaul represents a landmark, proactive step toward building a more transparent, cost-effective, and investor-centric mutual fund ecosystem in India. By unbundling fees, slashing hidden costs, and introducing performance-linked incentives, the regulator is placing the interests of the retail investor at the forefront of its agenda. While the industry may face short-term adjustments and margin pressures, the long-term benefits for millions of Indian mutual fund investors are clear, substantial, and poised to usher in a new era of trust and growth where investor outcomes are the ultimate measure of success.

[EasyDNNnews:PaidContentEnd] [EasyDNNnews:UnPaidContentStart]

[EasyDNNnews:UnPaidContentEnd]