SEBI’s Tough-Love Move: Why Stricter MF Rules May Actually Help Investors

It’s not often that a regulatory note creates ripples across India’s ₹50-lakh-crore mutual fund industry. But SEBI’s latest pre-regulation paper has done just that. While fund houses see it as a squeeze on profits, investors may finally get what they’ve long deserved - lower costs, greater transparency, and better value for every rupee invested.

At first glance, the proposals look harsh. But step back, and it’s clear that this is SEBI’s attempt to clean up costs, simplify disclosures, and make mutual funds more investor-centric. Here’s what’s changing - and why it matters.

Toning Down the TER: Making Mutual Funds Cheaper

The Total Expense Ratio (TER) is the cost mutual funds deduct from your investment every year to manage your money. SEBI now proposes to cut these fees by 15–20 basis points across both equity and non-equity schemes, with deeper cuts for funds managing higher assets under management (AUM).

Why is this important? Because every basis point matters. Many actively managed equity funds are already struggling to beat their benchmark indices or show a positive Information Ratio. Lowering TERs narrows the performance gap between active and passive funds - strengthening the case for index funds and ETFs.

In the long run, this move ensures investors retain more of their returns instead of losing them to recurring costs.

Statutory Cost Transparency: No More Hidden Charges

Currently, only the Securities Transaction Tax (STT) paid on AMC fees is disclosed separately. SEBI now wants all statutory levies - STT, GST, CTT, and stamp duty - to be listed separately from the TER.

Why does this matter? Today, these charges are bundled into the total expense ratio, so when tax rates are cut, investors don’t see any immediate benefit. By making these costs explicit, SEBI ensures that any future tax reduction directly boosts investor returns.

This level of cost transparency not only builds trust but also makes mutual fund pricing far more comparable and fair across categories.

Lower Brokerage Fees: Ending the Double Charge

This proposal is likely to spark the loudest debate. SEBI plans to cap equity brokerage at 2 bps (from 12 bps) and F&O brokerage at 1 bps (from 5 bps) on mutual fund transactions. The move will significantly reduce trading costs for investors - but brokers won’t be thrilled.

Here’s why: fund houses will likely push these cost reductions onto institutional brokers, who will then absorb the hit. However, for investors, it means they’ll no longer be double-charged for research - once as fund management fees and again as high brokerage commissions.

Even after accounting for taxes and statutory costs, mutual fund investors stand to gain from this change through direct cost savings.

Performance-Based TER: Rewarding Skill, But With Caution

SEBI also wants to introduce a performance-linked TER system. Funds that consistently outperform their benchmarks could charge slightly higher TERs, incentivizing genuine skill among fund managers.

The challenge? Ensuring that this system rewards skill, not risk-taking. In the past, some funds have taken excessive risks to chase higher returns - and a performance bonus could amplify that behavior. The key lies in using a smarter metric like the Information Ratio (which adjusts returns for risk and consistency) rather than raw outperformance alone.

If designed carefully, this model could finally align fund manager incentives with investor interests.

Why This Matters for Investors

SEBI’s proposed framework may not be popular among fund houses or brokers, but it directly strengthens investor protection and accountability in the mutual fund ecosystem. It simplifies fee structures, improves cost transparency, and promotes performance-based fairness.

For investors, the message is simple - mutual funds are getting cheaper, fairer, and more transparent. And when regulators push for investor-first reforms, the entire ecosystem benefits in the long run.

Key Takeaways

• SEBI plans to reduce TERs by 15–20 bps across mutual fund categories.
• All statutory charges (STT, GST, CTT, stamp duty) will now be shown separately for transparency.
• Brokerage fees will drop sharply - 12 bps to 2 bps for equity, 5 bps to 1 bps for F&O.
• Performance-based TERs may reward skilled fund managers, but must include risk-adjusted metrics.
• Overall, investors will gain from lower costs, better disclosures, and more accountability.

Regulation may seem tough in the short term but when it protects investors, it strengthens the market for the long haul.

Disclaimer: This article is for informational and educational purposes only and should not be considered as investment, legal, or regulatory advice.