SEBI Proposes Major Overhaul of Mutual Fund Rules

The Securities and Exchange Board of India (SEBI) has released a consultation paper proposing a major overhaul of mutual-fund regulations in a bid to simplify costs, boost transparency, and realign the way asset-management companies (AMCs) charge fees. The move marks one of the biggest regulatory reviews in India’s ₹75.6-lakh-crore mutual-fund industry, which now serves nearly 25 crore investor accounts.

At the center of SEBI’s proposal is a plan to bring greater clarity to the Total Expense Ratio (TER), the all-in cost investors pay for fund management. SEBI has proposed eliminating the additional 5 basis points (bps) that fund houses were allowed to charge across mutual-fund schemes. This extra allowance, first introduced in 2012 at 20 bps and reduced to 5 bps in 2018, was meant to offset exit-load credits (charges collected when investors redeem units early).

However, SEBI noted that actual average exit-load credits were around 5 bps, while funds were collecting 18–20 bps, far above the intended limit. The regulator now wants to remove this additional charge entirely to ensure investors are not overpaying hidden costs.

To balance the impact of this removal on fund houses, SEBI has suggested increasing the first two slabs of the expense ratio for open-ended active schemes by 5 bps. This minor upward revision could help offset operational costs for AMCs.

Another major proposal is to exclude statutory levies, including STT (Securities Transaction Tax), GST, CTT (Commodity Transaction Tax) and Stamp Duty, from the expense ratio cap. This means these taxes will no longer be part of TER limits and will instead be borne directly by investors. The change is aimed at creating a fairer and more transparent cost structure, ensuring future tax revisions don’t affect AMC margins.

SEBI has also proposed a voluntary performance-based fee framework, allowing AMCs to link part of their fees to the actual performance of schemes. This could encourage fund managers to focus more on returns while aligning investor and AMC interests.

Public feedback on these proposals has been invited until 17 November 2025, after which SEBI will review responses and finalize the new framework.

According to global brokerage Jefferies, SEBI’s proposals could pose a risk to AMC earnings, especially if the 5-bps removal is implemented as-is. Jefferies estimates that FY27 profit-before-tax (PBT) for HDFC Asset Management Company and Nippon Life India Asset Management could drop by 30–33% due to the change.

SEBI’s paper also proposes reducing cash-market brokerage fees on equity schemes from 12 bps to 2 bps, a move that could affect institutional brokers’ revenues. On the positive side, Jefferies believes that excluding statutory levies from the TER limit would be neutral to AMC earnings, since these costs are only being separated from the ratio rather than removed.

For investors, the consultation paper represents a move toward simpler and more transparent mutual-fund pricing. If implemented, the new TER structure could make it easier to compare funds and identify true management costs. It may also lead to slightly lower overall expenses, provided fund houses don’t offset the loss of 5 bps through other adjustments.

However, investors should watch for how AMCs respond. Some may introduce performance-linked fees, slightly raise base management charges, or adjust distribution structures.

For those invested in AMC stocks such as HDFC AMC or Nippon Life India AMC, the proposals introduce a new regulatory risk factor. Markets could begin pricing in potential earnings impact even before SEBI’s final decision, leading to short-term volatility in AMC valuations.

Ultimately, SEBI’s move seeks to balance investor protection with industry sustainability, aiming for clearer, fairer, and more performance-driven mutual-fund costs in India’s fast-growing market.