SEBI to revamp MF regulations: Dual gains for investors

3 Nov 2025 , 09:30 AM

WHAT IS THE SEBI CONSULTATION PAPER ABOUT?

Recently, SEBI put out a consultation paper on some far-reaching revamping of mutual fund regulations. There are proposed regulations pertaining to the way TER is charged, the inclusions in the TER, greater transparency in showing statutory charges, avoiding dual costing for research etc. The regulator has also proposed a sharp reduction in the brokerage that the mutual fund AMCs charge to investors as brokerage for execution. This could be a bone of contention, but will surely come as a relief to the mutual fund investors.

Remember, this is a consultation paper and SEBI has kept the paper open to public comments till November 17, 2025. Based on the feedback received, SEBI will take a final call on the regulations, subject to consultation with stakeholders. However, costs have become a big issue for mutual funds at a time when passive funds are performing exceptionally well and most of the so-called return leaders in the equity funds category are struggling to deliver positive information ratio. Here is a quick look at some of the key SEBI proposals.

REDUCTION IN TOTAL EXPENSE RATIO (TER)

At a macro level, there will be a reduction in the overall TER charged to investors. Currently, TER is charged to the fund on a daily basis, and reduced from the NAV. Here are some of the key changes proposed in the consultation paper.

• The reduction will be 15 bps for open ended funds and 25 bps for closed ended funds. We will focus more on the open-ended funds. Index Funds and ETFs will see their TER limits cut from 1.00% to 0.85%. For equity funds and FOFs investing over 65% in equity funds, the TER will be cut from 2.25% to 2.10%. Other FOFs will fall from 2.00% to 1.85%.
• For asset-based slabs that are based on the AUM, there will be a proportionate reduction in the TERs across various AUM slabs. For subsequent slabs, the cut will be between 10 bps to 15 bps.

This is likely to reduce the cost borne by mutual fund investors.

LOWER BROKERAGE CHARGED TO MUTUAL FUND INVESTORS

One of the major concerns for SEBI was that mutual funds were being double-charged for research services. Firstly, they were charged as part of the investment management and advisory fees by the AMC. Then they were again being charged as part of the sell-side brokerage charged by institutional brokers to mutual funds. Here is how SEBI plans to rationalize.

• Chargeable cash market brokerage (over and above TER) reduced from 12 bps to 2 bps. SEBI was of the view that the 12 bps contains the research cost also, so the mutual funds can now negotiate with the institutional brokers accordingly.
• Brokerage on derivatives will be reduced from 5 bps to 1 bps, since that is the average brokerage that is being charged by institutional brokers.
• In the last few years, there have been several cases of front-running by mutual fund dealers and conniving with institutional brokers. That was due to the large brokerage legroom available. Reduced legroom will also reduce such instances of insider trades.

This may hit the institutional brokerages more than the mutual funds as these lower costs are likely to be passed on.

ACCOUNTING FOR STATUTORY CHARGES SEPARATELY

One of the key principles of the SEBI amendments is that the TER must only contain the cost of managing the fund. Hence, GST, STT, CTT, and stamp duty; which are currently charged as part of TER, will be separated and charged on actuals and also disclosed. This will ensure that when the government reduces such statutory levies, they are seamlessly passed on to the mutual fund investors, without any leakage in between.

Currently, only the GST on fund management fees is allowed to be charged separately above the TER. Going ahead, all statutory charges including the STT, CTT, GST, and stamp duty charged by the institutional broker to the mutual fund will have to be shown at actuals and distinct from the TER. That means, the statutory costs, can no longer be merged along with the TER, but have to be shown separately, ensuring greater transparency in reporting. Also, the discretionary 5 bps additional cost allowance will be done away with.

PERFORMANCE BASED EXPENSE RATIOS

According to the consultation paper issued, SEBI is proposing a new framework where AMCs can charge performance linked expense ratios. For instance, the current expense ratio would hold up to a certain degree of outperformance. However, if the outperformance is more than that, then the AMC can receive a higher TER as an incentive. This would be voluntary and the AMCs may, or may not, opt for this practice. There must be caveats.

Firstly, the logic for outperformance must be very clear. It is not just enough to earn more than the index, but it must come with a positive information ratio. Market buoyancy must not be confused with fund manager outperformance. Secondly, there is a possibility that fund managers may be induced to take on undue risk to chase higher incentives. This must be implemented with proper checks and balances. Idea is to reward genuine outperformers.

To sum up, the proposed SEBI MF regulations will certainly reduce the costs for mutual fund in terms of TER and bring about greater transparency in loading and disclosure. However, SEBI may have to tread carefully on performance-based TERs, due to the inherent risks of such an approach, especially since it entails long term savings of retail investors!