Lower transaction costs could boost returns
The regulator plans to sharply reduce the caps on brokerage expenses. For cash market transactions, the limit may drop from 12 basis points to 2, and for derivatives, from 5 basis points to 1.
Lower transaction charges mean more of your invested money stays in the market, helping long-term compounding.
Experts say the reduction may not be as steep in practice because statutory charges such as STT, GST and stamp duty remain outside the cap. But even a 15–20 basis point reduction could meaningfully improve fund performance over years.
Performance-linked fees to align fund manager incentives
SEBI has also proposed performance-linked expense ratios, which would vary depending on how well a scheme performs. This could ensure that investors pay more when value is actually created and pay less when a scheme underperforms.
The detailed fee structure will be finalised after industry consultations. The approach marks a shift from 2023 proposals that aimed to include several charges within the total expenses — a move that faced pushback.
Cleaner segregation of businesses
Fund houses engaged in activities outside mutual funds may have to run those operations through separate business units. This change is designed to prevent cross-subsidisation and protect investor funds from risks unrelated to mutual fund management.
How investors stand to benefit
For retail investors, the proposals offer multiple advantages:
- More transparent and predictable charges
- Better alignment of fund manager goals with investor returns
- Higher potential alpha from active equity funds
- Stronger long-term outcomes due to lower drag on returns
A small reduction in fees on a long-term SIP or lump-sum investment can translate into tens of thousands of rupees saved over time.
Impact on AMCs may be higher in the short term
Brokerage estimates suggest that lower expenses could temporarily squeeze earnings for asset management companies. Morgan Stanley expects a 10–23% impact on profits for some firms if cost cuts apply completely to equity schemes.
Several listed AMCs such as HDFC AMC, Nippon India AMC, and Motilal Oswal AMC witnessed stock price declines of up to 6–8% after the proposals.
However, industry voices believe margins will stabilise as the mutual fund business continues to grow.
What should investors do now?
For now, there’s no action required from mutual fund investors. SIPs and ongoing investments can continue as usual. But as final rules evolve, investors may want to:
- Compare expense ratios more carefully while selecting new funds
- Prefer funds that consistently deliver performance net of costs
- Track communication from AMCs after SEBI finalises guidelines
Public feedback on the proposals is open until November 17, after which SEBI will take a final call.