Under the proposed framework, Sebi plans to eliminate the additional five basis points (bps) that asset management companies (AMCs) were previously allowed to charge across mutual fund schemes.
Markets regulator Securities and Exchange Board of India (Sebi) has proposed a comprehensive overhaul of mutual fund regulations, introducing clearer definition of Total Expense Ratio (TER) and revising limits on brokerage charges. In its consultation paper, the Securities and Exchange Board of India said that the proposals are aimed at bringing regulatory clarity, reducing redundancies, and promoting ease of compliance.
What Sebi Proposed
Under the proposed framework, Sebi plans to eliminate the additional five basis points (bps) that asset management companies (AMCs) were previously allowed to charge across mutual fund schemes.
This additional expense, introduced to offset the impact of crediting exit loads back to schemes, was first set at 20 bps in 2012 and later reduced to 5 bps in 2018. The additional expense of 5 bps that mutual fund schemes were allowed to charge was transitory in nature, Sebi noted.
Accordingly, with the objective of rationalising costs for unitholders, this expense has been proposed to be removed.
“However, to mitigate the impact of this change on the operations of AMCs, the first two slabs of the expense ratio for open-ended active schemes have been revised upward by 5 bps,” it added.
To protect interest of investors and to ensure that expenses are charged fairly only once to the investors, the brokerage charge has been revised from 12 bps to 2 bps for cash market transactions and 5 bps to 1 bps for derivative transactions to bring clarity and transparency, the regulator proposed.
Exclude all statutory levy
To facilitate greater clarity and transparency, Sebi has proposed to exclude all statutory levy – STT (Securities Transaction Tax), GST (Goods and Services Tax), CTT (Commodity Transaction Tax) and Stamp duty– from the expense ratio limits along with the present permissible expenses for brokerage, exchange and regulatory fees.
Presently, GST on management fees is permitted over and above the TER limit.
However, all other statutory charges are part of the overall TER limit specified for mutual fund schemes.
“The expense ratio limits are proposed to be exclusive of statutory levy, so that any change in statutory levy in future are passed on to the investors,” Sebi proposed.
What it means for investors
The SEBI consultation paper proposing a cut in the Total Expense Ratio (TER) is set to primarily impact mutual fund investors positively by reducing the cost of investing and enhancing fee transparency. However, the immediate effect on the industry is a negative impact on the profitability of Asset Management Companies (AMCs) due to a direct reduction in the fee income they can charge.
“This pressure is expected to be felt more significantly by large fund houses than by smaller or new entrants. Large AMCs, which manage the majority of the industry’s assets and benefit most from economies of scale, will experience a larger absolute revenue hit from the lower TER caps and the removal of the additional 5 bps charge. While SEBI has proposed a compensatory 5 bps increase in the TER for the lowest AUM slabs, this benefit mainly accrues to smaller schemes, offering only marginal relief to the largest players whose AUM primarily sits in the highest, lowest-fee slabs. Additionally, the sharp reduction in permissible brokerage and transaction costs will further squeeze margins across the board, compelling AMCs to lower operational expenses,” said Shivani Nyati, Head of Wealth at Swastika Investmart.
Puneet Singhania, Director of Master Trust Group, said that the move to reduce the Total Expense Ratio (TER) is a constructive step toward enhancing investor value and fostering greater cost efficiency within the mutual fund industry.
“Lower expenses will directly improve net returns for investors, reinforcing confidence in mutual fund products as a long-term wealth creation avenue. While the move may exert pressure on fund houses—particularly large AMCs with substantial AUMs—by compressing profit margins, it encourages greater operational discipline and transparency. Smaller and newer AMCs may face challenges in sustaining distributor pay-outs and marketing efforts; however, the overall reform aligns the industry with global best practices, ensuring a more investor-centric and competitive landscape,” Nyati concluded.
With PTI Inputs