Your Mutual Fund Costs Are Changing: Are You Aware?

An expense ratio is the annual fee that a Mutual Fund charges to manage your money. It covers costs such as research, fund management, administration, distribution and investor servicing. The fee is expressed as a percentage of the assets under management and is reflected in the fund’s returns. In simple terms, the expense ratio reduces your net gains because it is deducted from the returns before you see them. For example, if a fund earns 10 per cent and its expense ratio is one per cent, your effective return is around nine per cent.

Practical Example of How It Works

Imagine two mutual funds with identical performance of 10 per cent annually. Fund A charges one per cent as its expense ratio, while Fund B charges 0.90 per cent. Over time, the slightly lower cost in Fund B means more of your money stays invested, leading to a higher final corpus because of compounding. Small differences in fees may look insignificant in a single year but can add up to meaningful gains over the long-term.

What SEBI Changed Recently

The Securities and Exchange Board of India (SEBI) has introduced significant changes to how mutual fund charges are calculated and disclosed. SEBI has replaced the old Total Expense Ratio framework with a clearer concept called Base Expense Ratio, which excludes statutory levies such as Securities Transaction Tax, Goods and Services Tax and stamp duty from the core fee charged by the fund house. These statutory costs will now be shown separately to give investors a transparent view of what they are paying for management versus what is tax or levy related. This reform is part of a larger overhaul aimed at making mutual fund investing more transparent and investor-friendly.

SEBI has also cut the permitted fee caps in major categories. Index Funds and exchange-traded funds now have a lower expense cap under the new framework. Equity-oriented schemes also saw reductions in their permissible base expense limits in accordance with the new rules. Overall, the changes could lower costs for mutual fund investors by up to around 10 to 15 basis points on average.

Why It Matters to Investors

These changes mean that investors will get a cleaner picture of where their money goes. With statutory levies separated from management costs, it becomes easier to compare funds on their actual fees. Lower expense caps generally help improve net returns because less of the investor’s money is taken out to cover fees. This makes low-cost index funds and ETFs especially attractive for long-term investors who rely on compounding. Transparency often encourages competition among fund houses, as they may try to offer better net returns to attract investors.

Experts note that while the reform improves clarity and may slightly reduce costs, the overall benefit to long-term investors will depend on how fund houses adapt their pricing and product strategies. Some industry leaders see the changes as progressive and supportive of innovation, without significantly harming asset management companies’ ability to operate.

What Investors Should Do Now

First, investors should not focus only on the headline expense number. With statutory levies now separated, look at the Base Expense Ratio to understand the core cost of a fund. Compare net-of-fee historical performance rather than just the fee percentage alone. For long-term SIP or lump sum investments, even small cost gains from lower fees can compound into higher wealth over time. Finally, keep an eye on how AMCs respond to the new framework. Some may offer lower fee products or enhanced services to remain competitive.

The Bigger Picture

SEBI’s overhaul of mutual fund expense rules is one of the biggest regulatory shifts in years for the industry. By clarifying costs and tightening caps, the regulator aims to protect investor interests and promote wider participation in mutual fund investing. For investors, the message is simple: understand what you are paying for, use the clearer disclosures to make informed choices, and remember that lower ongoing costs over long investment horizons often translate into better outcomes for wealth creation.