Unbundling the bill

Summary: A single number was never telling the full truth about mutual fund costs. SEBI’s latest overhaul aims to change that. This piece explains what’s really shifting beneath the surface.

What this means for you

• Don't assume your fund costs are dropping 10–15 basis points overnight. Much of the "cut" is reclassification—statutory levies have simply moved outside the base expense ratio, not disappeared.
• Your fund factsheets will now show costs more honestly: base fees, brokerage, and government levies listed separately. Comparing funds becomes easier.
• The real savings are buried in trading costs. Brokerage caps have been halved (from 12 to 6 bps in cash markets, 5 to 2 bps in derivatives). If your fund trades frequently, this matters more than the headline TER change.
• An extra 5 bps charge that exit-load schemes were allowed is now gone—a small but genuine saving.
• Be wary of advice to switch from large, established funds to smaller or newer schemes. The reformed fee slabs give smaller funds higher expense allowances, creating fresh incentives for unnecessary churn.

India’s mutual-fund investor has long lived with a comforting illusion: that a single number “TER”, the total expense ratio, captures the true cost of owning a fund. It doesn’t. It merely bundles together very different things: the fund manager’s fee, distribution and operating expenses, and a set of statutory and regulatory levies that are not, in any meaningful sense, “fees” at all.

SEBI’s latest move is to stop pretending otherwise. At its board meeting on December 17, the regulator approved a comprehensive revamp of the mutual-fund rulebook (to be recast as the SEBI (Mutual Funds) Regulations, 2026), with an explicit aim: greater clarity, readability and investor protection, without diluting the core safeguards.

The headline-grabbing part is the overhaul of expense-ratio rules. The subtler part is what investors should not assume from those headlines.

What SEBI has actually changed

First, it has redrawn the definition of “expense ratio limits”. The cap that most people casually call “TER limits” will now be treated as a Base Expense Ratio (BER), and it will exclude statutory levies.

Second, it has forced an explicit separation between what is a fee and what is a tax/levy. Statutory and regulatory levies—SEBI explicitly lists STT/CTT, GST, stamp duty, SEBI fees, exchange fees, and the like, to be charged on actuals and, crucially, over and above the permissible brokerage limits.

Third, it has mechanically redefined “Total Expense Ratio.” Under the new framework, Total Expense Ratio = BER + brokerage + regulatory levies + statutory levies.

This is why the popular reading “SEBI has cut TER by 10–15 basis points” is not quite right. In many cases, what looks like a cut in the published cap is partly a rearrangement: the BER number will be lower because levies have moved out of it, not because the fund’s true all-in cost necessarily collapses overnight.

A simple illustration makes it clear. Suppose an equity scheme earlier disclosed a TER of 1.50 per cent (with levies embedded in that umbrella). Under the new approach, the “base” might display as 1.40 per cent (BER) plus statutory/regulatory levies on actuals. The investor may end up seeing a smaller net fall in the all-in TER than the first glance suggests, yet the disclosure will be more honest, and comparisons will become more meaningful.

The revised caps: Where the numbers land

SEBI has published revised BER limits (excluding statutory levies) across product types. For example, index funds/ETFs move from 1.00 per cent (including levies) to 0.90 per cent (excluding levies); fund-of-funds categories are similarly revised.

For open-end equity-oriented schemes, the BER cap is based on an AUM slab. The upper cap for small funds falls from 2.25 per cent to 2.10 per cent (for AUM up to Rs 500 crore), and for the largest funds (AUM > Rs 50,000 crore) it moves from 1.05 per cent to 0.95 per cent—again, these are “revised” numbers because levies are being excluded from the cap.

Closed-end schemes see similar recasting: equity-oriented closed-end schemes shift from 1.25 per cent to 1.00 per cent, and non-equity closed-end schemes shift from 1.00 per cent to 0.80 per cent (revised caps, excluding levies).

SEBI also notes that it moderated the impact relative to what was floated earlier: thresholds proposed in an October 28th, 2025 consultation paper (especially for equity schemes with AUM above Rs 2,000 crore) were revised upwards to limit disruption to AMC cost structures, largely by excluding statutory levies from BER.

The result is a compromise: more transparency, some rationalisation of caps, and less of a shock to fund-house economics than a blunt TER haircut would have produced.

Where the “real savings” may come from: Trading-cost plumbing

If the BER redesign is the headline, the bigger investor win may lie in the fine print on trading costs.

SEBI has tightened brokerage caps. In cash-market transactions, the existing cap of 12 bps included statutory levies; SEBI now specifies that the cap net of levies has effectively been reduced to 6 bps (exclusive of levies).

In derivatives, the existing cap of 5 bps included levies; the cap net of levies is now 2 bps (exclusive of levies).

SEBI has also removed an additional 5 bps that schemes with exit loads were earlier permitted to charge as a transitory measure.

These changes are less glamorous than “TER down!”, but they are where leakages often hide, especially in strategies with higher portfolio turnover. If fund houses actually pass these savings through (rather than reabsorbing them elsewhere within allowed limits), investors should see a cleaner cost structure.

The broader rewrite: Less paperwork, more coherence

This TER reform sits inside a wider regulatory overhaul. SEBI says the 2026 regulations are being restructured for clearer language and consolidation: sponsor eligibility criteria (including Mutual Fund Lite), AMC/trustee roles and prudential limits/valuation provisions are being reorganised for easier reference.

The revamp also aims at “ease of compliance”: fewer annual trustee meetings, removal of separate half-yearly portfolio disclosures, elimination of duplicative filings (since mutual fund units are now covered under SEBI’s insider-trading regulations), and “digital-first” disclosures replacing older physical processes.

It even trims dead wood: redundant chapters on Real Estate Mutual Funds and Infrastructure Debt Fund schemes are to be deleted, since separate frameworks already exist.

SEBI claims the result is a materially shorter, cleaner rulebook, fewer pages and improved readability.

What to watch next: Incentives, mis-selling, and “small-scheme temptation”

Every reform produces second-order effects.

One likely flashpoint is how AMCs and distributors adjust incentives. When cost components are unbundled and brokerage caps tighten, there can be pressure on the economics of distribution (especially where commissions are negotiated within the overall expense envelope). Some distributors may feel squeezed; some AMCs may redesign product and commission structures to protect margins.

A second risk is scheme proliferation. The AUM-slab structure creates a predictable temptation: smaller schemes can carry higher caps. That does not automatically mean AMCs will flood the market with tiny funds, but the incentive exists. If it leads to clutter—more similar schemes, more NFO marketing, more investor confusion- the industry would have gained transparency at the cost of complexity.

A third, very practical risk is churn, especially from relationship managers who push investors out of large, established funds into smaller/newer schemes where costs and incentives may be more generous. The reform does not cause this behaviour, but it can create fresh selling angles for it.

A clear verdict

SEBI’s move is best understood not as a populist “fee cut”, but as a serious attempt to make mutual-fund costs legible. It takes the industry one step closer to the principle investors deserve: tell me what you charge me; don’t hide behind a single blended number.

Whether investors feel it in their returns will depend on implementation, how faithfully AMCs disclose the components, how distribution adapts, and how sharply SEBI monitors attempts to game the spirit of the reform. But as a regulatory direction, it is hard to argue against: transparency first, and savings where the system can credibly deliver them.

Also read: SEBI plans major mutual fund overhaul, lower expense ratio