GREENVISSAGE EXPLAINS: Why mutual funds will soon cost less in india?
The Securities and Exchange Board of India (SEBI) has released a consultation paper that proposes sweeping changes to how asset management companies (AMCs) charge for managing funds. These changes are designed to reduce hidden costs, enhance clarity for investors, and modernise a regulatory framework that has remained largely unchanged for decades. While this evolution will benefit investors through lower costs, it also introduces new challenges for fund houses that may need to rethink their business models. Over the past decade, mutual funds have evolved from niche investment vehicles to mainstream financial products. The industry has grown tremendously in scale, with total assets under management increasing many times over, and participation expanding beyond metropolitan areas to smaller towns through digital and distributor networks. As mutual funds have grown, so too have the fees charged by AMCs. These costs were justified initially by the need to expand distribution and educate investors. However, as the industry has matured, economies of scale have set in, making it increasingly possible to manage funds more efficiently.
A major reason costs are expected to fall lies in SEBI’s recognition that the regulatory structure governing mutual fund expenses is outdated. Many of the existing rules were framed decades ago, during a period when the industry was much smaller and less competitive. SEBI’s consultation paper marks a decisive attempt to align the cost framework with present realities. The regulator proposes to reduce brokerage and transaction costs that AMCs can pass on to investors, bringing them down from 12 basis points to 2 basis points for cash market trades and from 5 basis points to 1 basis point for derivatives. This represents a sharp cut of roughly 80 per cent and will likely force AMCs to internalise more of their trading expenses rather than passing them to investors.
Another crucial change is the exclusion of statutory levies such as GST, STT, and stamp duty from the total expense ratio (TER) cap. These charges will now need to be disclosed separately, providing greater transparency. This approach prevents fund houses from including these levies within their expense ratio and inflating costs indirectly. SEBI also plans to remove the small 0.05 per cent add-on that some schemes currently charge in connection with exit loads, except for the smallest open-ended schemes. Furthermore, the regulator has proposed an optional performance-linked fee model that would allow fund houses to charge more if their funds outperform benchmarks and less if they underperform. This initiative could foster a merit-based fee system that rewards genuine performance rather than simply asset size.
The new framework, however, will not be without consequences for fund houses. AMCs will likely face tighter profit margins due to the reduced flexibility in charging expenses. Research analysts have already warned that AMC’s profitability could take a hit of up to ten per cent if these proposals are implemented in their current form. Smaller fund houses, which may lack scale or rely heavily on commissions and higher TERs, could be particularly vulnerable. This may trigger consolidation in the industry or push fund houses to invest in technology-driven operational efficiencies. Distributors, too, will need to adapt. With commissions coming under pressure, they may have to pivot from being primarily product sellers to becoming holistic financial advisors, focusing more on personalised service and value-added guidance rather than volume-based commissions.
Investors should expect a gradual transition as these changes are implemented. Mutual fund documents will soon display clearer breakdowns of costs, and expense ratios may adjust as fund houses adapt to the new norms. It will be important for investors to compare funds within similar categories and understand whether any remaining higher costs are justified by superior performance or differentiated strategies. The introduction of performance-linked fees will add another layer of complexity, and investors should pay attention to how benchmarks and performance thresholds are defined. Ultimately, while the cost structure becomes more transparent, thoughtful fund selection will remain essential.