Investors Gain From SEBI's Mutual Fund Fee Reset; Experts Warn of Lower Research, Distribution Support

The Securities and Exchange Board of India recently unveiled a set of structural changes aimed at rationalising mutual fund costs and improving transparency by lowering the brokerage and expense ratio costs.

The market regulator’s long-awaited overhaul of mutual fund expense rules has turned out to be far less disruptive than initially feared. While investors stand to benefit from lower costs and clearer disclosures, the sharp relief rally in asset management company (AMC) stocks suggests that the market had already priced in a far harsher regulatory outcome.

But few experts say that while these reforms are investor-friendly on the surface, they could have unintended consequences for research quality and distribution incentives over the longer term.

At its latest board meeting, the SEBI unveiled a set of structural changes aimed at rationalising mutual fund costs and improving transparency.

The most significant of these is the introduction of a Base Expense Ratio (BER), which separates fund management and operating costs from statutory levies such as GST and securities transaction tax (STT).

In addition, SEBI has opted for a 10 basis point cut in overall total expense ratios (TER), well short of the 15 bps reduction proposed earlier, removed the additional 5 bps TER allowed on schemes with exit loads, and revised brokerage caps to 6 bps for equity cash trades and 2 bps for derivatives, excluding statutory levies. These changes will take effect from April 2026, giving the industry time to adjust.

One basis point is one-hundredth of a percentage point.

The final framework has been widely described as a “middle-ground” solution that avoids sharp margin shocks for AMCs. This moderation was welcomed by the market, particularly after months of uncertainty following SEBI’s October discussion paper.

According to Geojit Investments Ltd., AMC stocks had been under pressure since October on fears of aggressive cost cuts.

Vinod Nair, head of research at the Kochi-based stockbroker, said the final rules triggered a relief rally, helping the sector recover most of its earlier losses. He noted that while the new BER structure is expected to reduce costs by 10–15 bps across categories and significantly improve transparency, further upside in AMC valuations now appears limited.

“Regulatory relief is largely priced in,” Nair said, adding that larger AMCs are better placed to absorb margin pressure due to scale advantages, while smaller players may face relatively greater strain he adds.

From an investor’s perspective, separating statutory levies from the BER is a meaningful structural improvement, said Vipul Bhowar, senior director and head of equities at Waterfield Advisors.

Under the new framework, investors can clearly see what they are paying for fund management, making scheme comparisons easier and more accurate.

Lower BER caps especially for passive funds also reduce the scope for cost opacity. Large AMCs stand to benefit from GST savings of around 12–13 bps on agent commissions, which helps cushion profitability. As a result, the estimated net revenue impact for AMCs is now pegged at 3-4%, far lower than earlier fears of a 6-8% hit Bhowar adds.

Brokerage firm Prabhudas Lilladher Capital described the SEBI board outcome as a "breather for AMCs and brokers". While the removal of the additional 5 bps TER linked to exit loads is technically negative, analysts believe this impact was already factored in after AMC stocks corrected 4–5% following the October consultation paper says the firm.

As per PL Capital, the revised brokerage caps are expected to hurt broker revenues by 15–20% in equity cash segments and 3–5% in derivatives. However, this is far milder than the initially proposed cuts and has eased concerns of a severe disruption to the broking ecosystem.

On the contrary, legal experts have raised concerns around regulatory overreach.

Finsec Law Advisors Managing Partner Sandeep Parekh argued that a modern regulator should ideally not dictate AMC fees unless competition is demonstrably failing.

Parekh pointed out that when SEBI revised TERs in 2019, it had publicly explained why competitive forces were not driving down costs. “This time, no such rationale has been shared,” he said.

He warned that lower fees could have unintended second-order effects, including a decline in research quality or weakened distribution incentives if intermediaries shift towards higher-margin financial products.

Shifali Sarsangee of Funds Ve’daa said lower caps on expense ratio would also lower the total pool of distributor commission and this may lead to rationalisation of trail commissions and margin compression. This could push distributors to better justify their advisory role, shifting the focus from product-selling to genuine financial advice, a long-standing regulatory objective.

Most experts agree that SEBI’s reforms mark a meaningful step toward greater transparency and investor protection without destabilising the mutual fund industry. Standardised cost disclosures make it easier for investors to compare schemes and take more informed decisions, particularly in an environment where retail participation continues to deepen.

However, the real test will unfold over time. Whether lower costs translate into sustained growth in retail participation without hurting the ecosystem that supports fund research, performance, and distribution will determine the long-term success of these reforms.