SEBI’s New Mutual Fund Rules: Lower Fees, More Transparency — But What’s the Catch?

From lower brokerage caps to performance-linked fees — SEBI’s proposed reforms could reshape how mutual funds charge, disclose, and deliver returns.

Hello and welcome back to The Finance Lens!

A quick note before we dive in. This Sunday’s post is a bit different. Usually, I cover sector analysis — and we have already gone through almost 30 sectors! Hard to believe. I will be wrapping that series up soon. But if there is still any sector you feel I missed or would like me to cover, drop a comment — I will try to squeeze it in before we close that chapter.

Today, though, I want to talk about something that affects almost every investor — mutual funds. And if you think the rules here are set in stone, well, SEBI’s about to shake things up.

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In a perfect world…

In a perfect world, mutual funds would be simple machines that take your money, invest it smartly, and return your share of the gains — clean and lossless. Every rupee would go exactly where you intended.

But that’s not how the real world works. Between fund managers, distributors, brokers, compliance costs, and marketing spends, a few bites get taken out of your investment before it even reaches the market. Some of these cuts make sense — after all, people need to be paid for managing your money — but others, not so much.

And because most of us can’t see the fine print behind these expenses, SEBI has decided it is time for some transparency.

The regulator recently put out a consultation paper proposing big changes to how mutual funds charge fees, disclose costs, and calculate expenses. Nothing is final yet — but the direction is clear.

Let’s unpack it.

Total Expense Ratio (TER): What’s Really Inside

Every fund has something called a Total Expense Ratio, or TER — basically, a tiny slice of your investment that goes to cover management and operating costs.

Here is the catch: most of us never really know what all goes inside that slice. Some parts go to the fund house, some to the government (like GST or Securities Transaction Tax), and some just… disappear under “miscellaneous.”

SEBI wants to change that. The new proposal asks funds to itemise every expense, line by line. That means you will know how much goes to your fund manager and how much goes to taxes or exchange fees.

Also, SEBI wants to exclude statutory charges (like GST and STT) from the TER cap, so investors can see what’s truly being charged by the AMC itself. To keep things balanced, it will slightly reduce the TER ceiling — so you will probably pay about the same overall, but you will understand the bill better.

It is like going from a mystery restaurant bill to one where you can finally see who ordered the extra dessert.

Brokerage Fees — SEBI Just Pulled Out the Scissors

This one’s a big deal.

Whenever your mutual fund buys or sells stocks, it pays a brokerage fee. That cost is passed on to you, on top of the TER. Right now, funds can charge up to 0.12% per equity trade and 0.05% on derivatives.

But SEBI noticed something odd. Some funds — like arbitrage ones — were paying just 0.01%, while others were paying five or ten times that. Turns out, certain brokers were bundling extra “services” like research reports into their brokerage costs… and those got passed on to investors too.

That is like paying your driver to drive and then being billed again because he used GPS.

So SEBI wants to cut brokerage limits drastically — to 0.02% for equities and 0.01% for derivatives.

If a fund pays more, it will have to absorb that within its own TER.

This could hurt brokers who depend on institutional clients, but for regular investors, it is great news. Cheaper execution, fewer hidden costs, and no more paying twice for the same service.

A “Performance Fee” Era Might Be Coming

Here is something interesting.

Right now, fund managers earn roughly the same fee whether they outperform the market or not. But SEBI is floating the idea of a performance-linked expense ratio — where fund houses could charge a bit more if they beat their benchmark, and less if they don’t.

On paper, this sounds fair — if my fund manager consistently delivers, I don’t mind paying a little extra. But if he is just mirroring the index, why should I?

However, this model needs fine-tuning. Too low a benchmark and investors end up overpaying. Too high, and fund managers might take unnecessary risks to chase returns. SEBI has not finalised this yet — it is more of a “testing the waters” move.

Still, it is refreshing to see the regulator even exploring a system that rewards performance rather than size.

Exit Loads — The Add-On Era Ends

Remember those exit loads — the tiny penalties for redeeming your units too early? Once upon a time, fund houses could pocket that money. SEBI stopped that in 2012, saying exit loads should only benefit the remaining investors.

But funds were still allowed a small add-on of about 5 basis points to offset early redemptions. Now, SEBI plans to scrap that too.

To keep things fair, funds might be allowed to adjust their TER slightly upward, but the message is clear — no more small hidden extras.

What It All Means

At first glance, these changes might look like decimal-point adjustments — a few basis points here, a few there. But collectively, they represent a major shift toward transparency.

Mutual funds will now have to show exactly where every rupee goes. For investors, that’s huge. For fund houses, it is a wake-up call to justify every cost they pass on.

And in a ₹50-lakh-crore industry, even a small change in expenses can add up to thousands of crores in investor savings.

A Quick Personal Take

When I first started investing, I barely understood what TER meant. I just looked at past returns and picked a fund. But over time, I realised that expenses are like termites — small, quiet, and capable of eating into long-term returns without you even noticing.

So if SEBI is bringing in reforms that make these costs easier to understand and compare, I am all for it.

The Bottomline

These proposals are not the law yet, but they give us a glimpse of SEBI’s intent — cleaner disclosures, simpler structures, and fairer costs.

In short: less fog, more light.

And that’s exactly what Indian investors need right now.

Your Turn

That is it for this week’s Sunday Special. I will be back to sector analysis soon — unless you tell me what is still missing. We have covered 30+ sectors so far, but if there is any industry you would like to see broken down before the finale, drop a note.

Till then, keep learning, stay curious, and don’t let hidden fees eat your compounding.

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