The Securities and Exchange Board of India (SEBI) has proposed sweeping reforms to the fee structure of mutual funds, targeting lower investor costs and greater transparency in expense management. The proposed changes — particularly in brokerage caps and performance-linked fees — could reshape how asset management companies (AMCs) charge investors, with a direct impact on long-term returns.
Lower transaction costs to support higher returns
One of SEBI’s key proposals is a sharp reduction in brokerage expense limits.
- For cash market transactions, the cap may fall from 12 basis points to 2.
- For derivative transactions, the ceiling could drop from 5 basis points to 1.
Since expense ratios are deducted from a scheme’s Net Asset Value (NAV), any reduction in these costs can directly boost investor returns.
Market experts believe even a modest 15–20 basis point reduction could enhance long-term fund performance, especially for active equity funds. However, statutory charges such as STT, GST, and stamp duty will remain outside this limit.
Performance-linked fees to align fund manager incentives
SEBI also plans to introduce performance-linked expense ratios, allowing AMCs to charge higher fees only when they deliver above-average returns.
This structure aims to better align fund managers’ incentives with investor outcomes, ensuring investors pay more for value creation and less when a fund underperforms.
This marks a shift from SEBI’s 2023 proposal, which had faced opposition for attempting to include several overheads within total expenses. The regulator will finalise details after industry-wide consultations.
Segregation of non-mutual fund businesses
To improve governance, SEBI has proposed that fund houses engaged in other financial activities must operate those businesses separately.
This segregation is expected to reduce cross-subsidisation and prevent risks from spilling over into mutual fund operations — thereby protecting investor capital.
Impact on investors
For retail investors, these changes could lead to:
- More transparent and predictable costs
- Better alignment of fund manager goals with performance
- Higher potential alpha from active management
- Improved long-term returns through lower fee drag
Even small fee reductions can compound meaningfully over years — adding tens of thousands of rupees to long-term SIP or lump-sum portfolios.
Short-term pressure on AMCs
While investors stand to gain, brokerage estimates suggest a 10–23% hit to AMC profits if the proposed cost reductions are applied across equity schemes.
Shares of listed AMCs such as HDFC AMC, Nippon India AMC, and Motilal Oswal AMC fell 6–8% following SEBI’s announcement.
However, analysts expect margins to stabilise as the mutual fund industry expands, offsetting initial revenue compression with higher AUM growth.
What investors should do now
No immediate action is needed from investors. Ongoing SIPs and lump-sum investments can continue unchanged. However, investors are advised to:
- Compare expense ratios carefully when choosing funds
- Prefer funds with consistent net-of-cost performance
- Stay updated on AMC communications once SEBI finalises rules
Public feedback on the proposal remains open until November 17, after which SEBI will issue final regulations.
Disclaimer: The information provided is for informational purposes only and should not be considered financial or investment advice. Stock market investments are subject to market risks. Always conduct your own research or consult a financial advisor before making investment decisions. Author or Business Upturn is not liable for any losses arising from the use of this information.
