SEBI Proposes Overhaul of Mutual Fund Expense: What You Need to Know

The Securities and Exchange Board of India (SEBI) has recently proposed significant revisions to the way mutual fund expenses are structured. This move aims to lower costs for investors and enhancing transparency across the industry. Since expense ratios are deducted directly from a scheme’s Net Asset Value (NAV), even a small reduction can meaningfully boost long-term returns. 

Lower Transaction Costs, Higher Investor Gains 

SEBI’s proposal includes a sharp cut in the permissible caps on brokerage expenses. For cash market transactions, the ceiling could drop from 12 basis points to just 2, while for derivatives, it may fall from 5 basis points to 1. 

By reducing these transaction charges, a greater portion of investors’ capital remains invested, thereby strengthening the power of compounding over time. 

Linking Fees to Fund Performance 

Another key proposal involves introducing performance-linked expense ratios, allowing fund costs to vary based on a scheme’s actual returns. Under this structure, investors would pay more when the fund outperforms and less when it lags. This creates a more direct alignment between fund manager incentives and investor interests. 

The final contours of this fee framework will be decided after consultations with industry stakeholders. This marks a departure from SEBI’s 2023 proposal, which sought to include several operational costs within the total expense ratio — a move that had drawn considerable resistance from the fund industry. 

Clearer Business Segregation 

SEBI also plans to tighten operational boundaries. Mutual fund houses that run businesses outside their core asset management operations may be required to conduct them through distinct business units. This segregation is intended to prevent cross-subsidisation and shield investor assets from risks unrelated to mutual fund activities. 

What It Means for Investors 

For retail investors, these reforms promise several long-term benefits: 

• Greater transparency and predictability in costs
• Better alignment of fund manager incentives with investor returns
• Potential for improved alpha in actively managed funds
• Enhanced compounding through reduced fee drag. 

Also Read: SEBI Announces Key Reforms to Bank Nifty Index: What You Need to Know 

Even modest reductions in expense ratios can add up significantly over time, potentially translating into tens of thousands of rupees saved on long-term SIPs or lump-sum investments. 

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Disclaimer: This blog has been written exclusively for educational/Informational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions. 

Mutual Fund investments in the securities market are subject to market risks, read all the related documents carefully before investing.