Understanding SEBI's expense ratio and brokerage changes

Summary: SEBI’s December 2025 changes to mutual funds unbundle statutory levies from expense ratios for greater transparency, while lowering brokerage caps may offer modest savings.

SEBI’s December 17, 2025 board meeting brought in a set of changes to how mutual fund costs are defined and disclosed. Headlines quickly suggested that expense ratios had been ‘cut’, making mutual funds cheaper for investors. The reality, however, is more nuanced.

The regulator has reworked how expense limits are structured, improved transparency around what investors are actually paying for, and trimmed brokerage caps. While these steps are directionally positive, the actual reduction in investor costs is likely to be modest and will depend largely on how fund houses respond.

Here is what has changed, and what it really means for investors.

A new way of looking at expense ratios

The most important change relates to how expense ratio limits are defined. What investors earlier referred to as the Total Expense Ratio (TER) will now effectively be split into different components. SEBI has introduced the concept of a Base Expense Ratio (BER), which will represent the core cost of running a mutual fund: fund management, administration and distribution.

Statutory and regulatory levies will no longer be included within this cap. Charges such as STT or CTT, GST, stamp duty, SEBI fees and exchange fees will now be charged separately, over and above the BER.

The intent here is clarity. By unbundling pass-through taxes and levies, SEBI wants investors to see more clearly what they are paying the fund house for, as opposed to charges that are outside the fund’s control.

Lower limits, but not a straight cost cut

Along with redefining the expense structure, SEBI has also lowered the permissible BER limits across AUM slabs for both equity-oriented schemes and schemes other than equity.

On paper, the reduction works out to around 10 basis points for most schemes, and up to 15 basis points for some AUM slabs. The revised limits are shown below.

At first glance, this appears to be a clear win for investors. Over long periods, even small differences in costs can add up meaningfully.

For example, an investment of Rs 20 lakh growing at 12 per cent annually for 20 years would become about Rs 1.61 crore at a 1 per cent expense ratio. Cutting that by 10 basis points raises the final corpus by roughly Rs 2.9 lakh; a 15-basis-point reduction adds around Rs 4.4 lakh.

However, there is an important caveat. Earlier, expense ratios were disclosed after accounting for statutory levies. Under the new framework, those levies sit outside the BER. As a result, while the revised limits look lower, the total cost borne by investors may not fall by the same margin suggested by the headline numbers.

In effect, this change is primarily about unbundling and transparency, with cost reduction being a secondary, and relatively modest, outcome.

Brokerage caps

The second investor-relevant change relates to brokerage costs. SEBI has reduced the maximum brokerage that mutual funds can pay (net of levies):

• Cash market transactions: cap reduced to 6 basis points, from about 8.6 basis points earlier
• Derivative transactions: cap reduced to 2 basis points, from about 3.9 basis points earlier

Brokerage is a real cost for schemes, especially those with high portfolio turnover. Lower caps here can translate into genuine savings over time. That said, the benefit is unlikely to be dramatic. The impact will vary across funds, depending on how frequently they trade and whether fund houses pass on these savings to investors rather than absorbing them elsewhere.

What investors should take away

SEBI’s measures are best seen as a clean-up of cost disclosures rather than a sweeping cut in mutual fund expenses.

The redefinition of expense ratio limits improves transparency and makes it easier for investors to understand what they are paying for. Actual reductions in total costs, however, are likely to be modest once statutory levies are accounted for separately.

The brokerage cap reduction is where investors may see some real benefit, particularly in actively managed funds with higher turnover. Even here, the gains will be incremental rather than transformational.

As always, costs matter, but they are just one part of fund selection. Value Research Fund Advisor helps you track expense ratios, compare funds on a like-for-like basis, and choose investments that align with your goals, while keeping costs transparent and in perspective.

Explore Fund Advisor today

Also read: Unbundling the bill