SEBI plans major mutual fund overhaul, lower expense ratio

Summary: SEBI’s new consultation paper proposes a sweeping rewrite of mutual fund regulations to simplify, clarify, and modernise the framework. The overhaul targets lower investor costs, transparent disclosures, and stronger accountability across India’s Rs 75.61 lakh crore fund industry.

Securities and Exchange Board of India (SEBI), the markets regulator, has issued a consultation paper to propose a major overhaul to how mutual funds operate.

The draft aims to:

1. simplify language to make mutual fund rules clearer and more investor-centric
2. eliminate redundancies
3. modernise disclosure and governance norms for India’s Rs 75.61 lakh crore mutual-fund industry
4. And link expenses to performance, allowing mutual funds to move beyond the flat-fee model where investors pay a fixed TER (Total Expense Ratio) regardless of returns. It is likely that investors would pay a lower expense ratio when returns lag and a bit more when performance exceeds benchmarks.

Additionally, taxes such as securities transaction tax (STT), goods and services tax (GST), commodities truncation tax (CTT) and stamp duty will no longer be embedded within the total expense ratio (TER). Only fund house-related costs will remain inside. This separation means investors can now see exactly what portion of their expense ratio is fund house cost versus government levy.

In fact, the TER will clearly be defined to include every cost charged to investors such as management fees, brokerage, custodian and audit fees, GST and regulatory charges. Fund houses must publish a detailed cost breakup, making inter-fund comparison easier and preventing hidden charges.

Other proposals include:

1. Fund houses can expand, but with walls up

SEBI wants mutual fund companies to use their research and portfolio skills in other businesses too. But these activities must run as separate units with strict ‘Chinese walls’, no data or staff sharing.

Trustees and a special committee will oversee this, and these units must report directly to the CEO.

2. Big cut in brokerage charges

Brokerage limits may be slashed from 12 to 2 basis points for cash trades, and 5 to 1 for derivatives.

3. 0.5 per cent ‘extra expense’ to go

The long-standing 5 bps additional expense—introduced in 2012 to help fund marketing—will be removed. To balance this, SEBI has slightly increased the first two TER slabs for active open-ended funds by 5 bps.

4. Clear rules for fund closures

Once a fund is wound up, only essential costs—like custody, audit, or investor communication—can be charged. No management fees or distributor commissions can be levied, since the fund isn’t being run or sold anymore. This ensures investors pay only genuine closure costs and nothing extra.

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