Mutual Fund changes explained: Key points on TER, brokerage and investor costs

The Securities and Exchange Board of India (SEBI) on Tuesday (October 28) issued a Consultation Paper proposing a comprehensive review of the SEBI (Mutual Funds) Regulations, 1996, focusing on brokerage costs and the Total Expense Ratio (TER). The paper introduces a series of changes aimed at rationalising costs, improving transparency, and ensuring investor protection across mutual fund schemes.

Under the new framework, the transitory additional expense of 5 basis points (bps) on the entire AUM, permitted since 2018, has been removed. To balance this, SEBI has increased the first two TER slabs for open-ended active schemes by 5 bps, maintaining operational viability for Asset Management Companies (AMCs) while curbing investor costs.

All statutory levies, including STT, CTT, GST, and stamp duty, will now be excluded from the TER limits. This move enhances transparency and ensures these costs are passed directly to investors. Consequently, since GST on non-management expenses will be excluded, SEBI has reduced the base TER limits accordingly.

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A unified and transparent TER disclosure system has been proposed, requiring AMCs to clearly define "Total Expense Ratio." The TER must include management fees within slab limits, brokerage and transaction costs, exchange and regulatory fees, and statutory levies (disclosed separately). All disclosures must present a breakup by cost head for better investor clarity.

Brokerage and transaction cost caps have been sharply reduced — from 12 bps to 2 bps for the cash market and from 5 bps to 1 bps for derivatives — to prevent overcharging under “execution plus research” fees. In addition, SEBI has mandated the separation of execution and research costs, disallowing research services to be bundled within brokerage payments.

While brokerage remains capped, statutory levies such as STT, CTT, GST, and stamp duty incurred during transactions may be charged over and above these limits to avoid operational constraints for AMCs.

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The regulator has also proposed an optional differential TER framework linked to fund performance, allowing AMCs to levy higher or lower expenses based on fund results, aligning incentives more closely with investor outcomes.

Reinforcing cost discipline, SEBI clarified that all New Fund Offer (NFO)-related expenses until unit allotment must be borne by the AMC, trustee, or sponsor, and not charged to the scheme.