SEBI's Mutual Fund Revolution: When Fee Compression Becomes Industry Transformation

India's Mutual Fund sector, currently managing 75.6 lakh crore rupees across 24.3 crore investor folios, is bracing for one of the most consequential regulatory transformations since the sector's liberalisation in the 1990s. On October 28, 2025, SEBI released a comprehensive consultation paper proposing sweeping changes to mutual fund fee structures, marking a fundamental rebalancing of the industry's economic model that will reshape profitability calculations and competitive dynamics across asset management companies.

The Core Transformation
SEBI's proposals represent far more than coSMEtic fee adjustments. The regulator is systematically dismantling the fee structures that have underpinned AMC profitability for the past decade. The most dramatic change involves brokerage compression: cash market brokerage fees will plummet from 12 basis points to 2 basis points, while derivatives brokerage will decline from 5 basis points to 1 basis point. Simultaneously, the transitory 5 basis points additional expense charge long presented as temporary is being permanently eliminated.​

The rationale is compelling from an investor protection standpoint. Historically, AMCs bundled research services with brokerage execution, effectively charging investors twice for analytical services. By uncoupling these services and capping brokerage strictly to transaction costs, SEBI aims to ensure investors pay only once for any given service.

The Cascading Financial Impact
The financial implications are severe. Consensus estimate that brokerage compression alone will eliminate approximately 6,000-8,000 crore rupees in annual industry revenues. When combined with the removal of the 5 basis points transitory charge and exclusion of statutory levies (STT, GST, CTT, stamp duty) from TER limits, the total annual fee pool available to the mutual fund industry contracts by 15,000-18,000 crore rupees over three years.

For perspective, the mutual fund industry currently generates approximately 75,000+ crore rupees annually in total fees. SEBI's changes represent a 20-24 per cent compression of this revenue base an existential threat to traditional business models that were predicated on continuous scale growth enabling margin expansion.

The Asymmetric Impact Across AMCs
The reforms will disproportionately impact mid-sized and smaller asset management companies. Organisations like Franklin Templeton, Invesco India, and Tata Mutual Fund, which built businesses around active management differentiation and distribution breadth, face structural margin pressures. Conversely, mega-cap AMCs (ICICI Prudential, Axis, Nippon Life India) with extreme cost discipline and passive fund infrastructure can absorb the compression through operational efficiency.

Smaller distributors face equally challenging dynamics. Financial advisors and mutual fund distributors earning 1-1.5 per cent commission on assets under management will become economically unviable as commissions compress to effectively 0.3-0.5 per cent across most schemes. This accelerates the technological disintermediation already underway through fintech platforms and robo-advisors.

Strategic Recalibration Required
SEBI's consultation period (closing November 17, 2025) will determine implementation timelines, but the fundamental direction appears irreversible. The question is not whether these changes occur, but how quickly market participants adapt to a structurally lower-margin, higher-efficiency mutual fund ecosystem.