SEBI’s New Mutual Fund Rules: Lower Fees, Higher Returns

On October 28, 2025, the Securities and Exchange Board of India (SEBI) released a landmark consultation paper proposing the first comprehensive overhaul of mutual fund fee structures in nearly three decades. These proposed changes to the Total Expense Ratio (TER) framework aim to make India’s ₹75.6 lakh crore mutual fund industry more transparent, cost-effective, and investor-friendly. With public comments invited until November 17, 2025, industry stakeholders are carefully evaluating how these regulations will reshape profitability, operational models, and competitive dynamics.

What Are the Core Proposed Changes?

SEBI’s consultation paper introduces several significant modifications to the existing SEBI (Mutual Funds) Regulations, 1996. The most impactful change is the complete removal of the additional 5 basis points (bps) charge that Asset Management Companies (AMCs) were allowed to levy on schemes with exit loads. This provision, originally introduced at 20 bps in 2012 and reduced to 5 bps in 2018, will be eliminated as SEBI deems it “transitory in nature.”

To partially offset this removal, SEBI has proposed increasing the TER for the first two AUM slabs of open-ended active equity schemes by 5 bps. Specifically, schemes with AUM up to ₹500 crore will see TER increase from 2.25% to 2.30%, while the ₹501-750 crore slab will rise from 2.00% to 2.05%. However, larger schemes will face reductions in funds, with those with AUM above ₹50,000 crore will see their TER decrease from 1.05% to 0.90%.

The regulator has also proposed drastic cuts to brokerage and transaction cost caps. Cash market transaction caps will drop from 12 bps to just 2 bps, an 83% reduction, while derivative transaction caps will fall from 5 bps to 1 bps, representing an 80% cut. SEBI’s rationale is to prevent double-charging, as investors were effectively paying for research both through management fees and bundled brokerage costs.

Additionally, all statutory levies, including the Securities Transaction Tax (STT), Goods and Services Tax (GST), Commodity Transaction Tax (CTT), and stamp duty, will be excluded from the TER limits and charged separately. This change enhances transparency by ensuring that TER purely reflects fund management and operational costs, while any future statutory changes are directly passed to investors.

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How Will AMCs Be Impacted Financially?

According to estimates from Jefferies, these proposed changes could reduce Profit Before Tax (PBT) for major AMCs by approximately 8-10% by FY27 if implemented as outlined. The removal of the 5 bps charge alone could impact profitability significantly for leading players like HDFC AMC and Nippon AMC, this single change could reduce FY27 PBT by 30-33%.

The margin impact is estimated at 680-850 bps compression across the industry. However, large AMCs with substantial starting margins have built-in cushions. For instance, HDFC AMC’s Q2 FY26 report showed PBT margins exceeding 85%, suggesting the company would remain highly profitable even under worst-case scenarios.

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The partial offset through increased TER on smaller AUM slabs primarily benefits smaller funds rather than large fund houses that manage massive assets. Since the majority of traditional open-ended mutual fund schemes, perhaps 50-70% or more have exit loads (especially equity and hybrid schemes), the removal of the 5 bps charge represents a direct revenue loss across the entire AUM base.

The sharp brokerage cap reductions add another layer of pressure, severely limiting cost recovery for active fund management strategies that involve portfolio churning. The 83% reduction in cash market caps and 80% in derivatives will particularly impact arbitrage and actively managed funds.

Are There Any Silver Linings for AMCs?

Despite the challenges, some positive aspects exist. SEBI has proposed introducing optional performance-linked TER, which could provide upside for well-performing funds if adopted. This would align manager incentives with investor outcomes, allowing AMCs to charge higher fees when they deliver superior returns.

Moreover, India’s mutual fund industry continues to benefit from powerful growth tailwinds. AUM has grown from ₹10.8 trillion in 2015 to ₹75.4 trillion currently, with projections to cross ₹100 trillion. Strong SIP flows which reached ₹28,270 crore in August 2025 continue supporting asset growth. This expanding asset base could partially compensate for per-unit margin compression through volume growth.

What Does This Mean for Brokers and Distributors?

Brokers face perhaps the most severe impact among all stakeholder categories. The proposed reductions in brokerage caps represent an existential challenge for institutional brokers who derive significant revenue from mutual fund execution business. Retail brokers will experience revenue compression across equity and derivative trading segments, potentially forcing them to seek alternative revenue streams or reduce service levels.

Distributors face a moderate negative impact, varying by business model. The removal of the 5 bps additional charge creates pressure as AMCs may offset this loss by reducing distributor commissions. However, companies like Prudent Corporate Advisory Services, which operates a B2B2C platform with 31,452 channel partners across 135 locations, have greater flexibility to pass costs downstream to sub-distributors, limiting direct earnings impact.

Some AMC estimates a 4.8% earnings hit for Anand Rathi and 2% for 360 One, both of which run direct wealth management businesses with less flexibility to transfer cost pressures.

Will RTAs Like CAMS and KFintech Be Affected?

Registrar and Transfer Agents (RTAs) face minimal direct impact from these TER changes. Companies like CAMS (68-69% market share) and KFintech (29-30% market share) charge AMCs separately for operational services, folio management, transaction processing, and investor communication rather than having fees embedded in investor-facing TER.

During CAMS’ Q2 FY26 concall, management acknowledged the SEBI discussion paper but indicated it was too early to quantify any impact. They noted that if AMCs face severe margin pressure, rate renegotiations might be requested, but emphasised that CAMS has made its delivery model highly efficient and price-competitive, suggesting any pass-through pressure would be limited.

Both RTAs maintain strong competitive moats given the duopoly market structure, which provides what Porter’s Five Forces framework calls “bargaining power of suppliers.” Their essential infrastructure status, robust margins (43-45% EBITDA), and diversified revenue bases reduce vulnerability to these regulatory changes.

What Should Investors Expect?

For mutual fund investors, these proposals represent clear and positive progress. Lower TERs mean reduced costs and the potential for better long-term returns. The exclusion of statutory levies from TER calculations brings greater transparency, helping investors clearly see what they are paying for fund management, not hidden or bundled charges.

The sharp reduction in brokerage caps ensures investors are no longer indirectly paying twice for research services. With improved disclosure standards, comparing the true cost structures of schemes becomes easier, empowering smarter and more informed financial decisions.

Most importantly, SEBI’s proposal ensures that economies of scale enjoyed by large mutual funds are finally shared with investors rather than retained solely by AMCs. For large equity schemes with AUM above ₹50,000 crore, even a 15 bps reduction in TER can translate into meaningful long-term savings and significant compounding benefits.

At Moneyvesta Wealth Management, we believe regulations like these strengthen the investing ecosystem and help investors build wealth with more clarity, confidence, and cost efficiency. As the landscape evolves, our focus remains the same guiding investors toward strategies that align with their goals and protect their long-term financial growth.