SEBI Proposes Overhaul of Mutual Fund Fee Structure: A Deep Dive into the Regulatory Shake-Up

In a landmark move that could redefine the Indian mutual fund (MF) landscape, the Securities and Exchange Board of India (SEBI) has proposed sweeping changes to the mutual fund fee structure, aiming to improve transparency, reduce investor costs, and standardize expense norms across the industry.

The consultation paper, released on October 29, 2025, outlines an extensive revamp of Total Expense Ratio (TER) guidelines, brokerage caps, and performance-linked fees—potentially marking the biggest regulatory shift in the mutual fund industry in nearly three decades.

While investors may benefit from lower costs, the proposed norms have sent shockwaves through the capital market, causing a sharp fall in AMC (Asset Management Company) stocks like HDFC AMC, Nippon Life India, Aditya Birla Sun Life, and UTI AMC, which tumbled up to 10% in early trading.

Background: Why SEBI is Reworking the Mutual Fund Fee Structure

The mutual fund ecosystem in India, worth over ₹60 lakh crore, has evolved rapidly. However, SEBI found that fee structures and operational expenses have become increasingly complex and inconsistent across fund houses.

The regulator’s main concerns include:

• Opaque fee distribution, leading to confusion among investors.

• High brokerage commissions reducing net investor returns.

• Fragmented expense disclosures across fund categories.

• Lack of performance-linked accountability for fund managers.

As SEBI chairperson Madhabi Puri Buch previously emphasized, “The intent is not to penalize AMCs but to ensure that every rupee of investor money is justified with transparency and efficiency.”

Key Proposals in SEBI’s Consultation Paper

1. Overhaul of Total Expense Ratio (TER) Framework

SEBI has proposed a revised TER structure that directly links the expense ratio to the assets under management (AUM) of a fund house, eliminating certain embedded costs and distribution-linked charges.

Key Highlights:

• Simplification of TER slabs across fund categories.

• Elimination of the additional 5 basis point (bps) expense currently allowed for B-30 (beyond top 30 cities) investments.

• Uniformity across active and passive schemes to minimize hidden costs.

2. Cap on Brokerage and Transaction Costs

Mutual funds currently pay brokers transaction charges between 1.18 to 1.34 bps. SEBI now proposes a sharp cut, capping brokerage and transaction costs to further protect investor returns.

This could significantly impact fund managers who rely on broker networks for large trades, but it ensures greater cost efficiency.

3. Introduction of Performance-Linked Fees

In a first for the Indian mutual fund industry, SEBI has suggested performance-based fees — a model where AMCs earn variable income depending on how their schemes perform relative to benchmarks.

Impact:

• Aligns AMC earnings with investor outcomes.

• Promotes accountability and encourages fund managers to focus on consistent performance.

4. Transparency and Disclosure Norms

SEBI plans to make expense breakups more granular and visible. Fund houses will be required to:

• Publish detailed expense sheets periodically.

• Disclose fund-wise and scheme-wise commissions paid to distributors.

• Maintain transparency in how fund-related costs are allocated.

5. Simplification of KYC and Onboarding

Although part of a separate proposal, SEBI is also working to standardize the mutual fund folio opening process, ensuring KYC compliance through a unified central registry system. This move complements the fee reforms by streamlining investor access.

Market Reaction: AMC Stocks Take a Hit

The market’s immediate reaction was swift and sharp. Stocks of major asset management companies—HDFC AMC, Nippon India AMC, Aditya Birla Sun Life AMC, and UTI AMC—fell between 6% to 10% within hours of the announcement.

According to Business Standard, analysts estimate that the proposed reforms could reduce AMC profit margins by 30–33%.

However, experts believe the long-term impact could be positive. Feroze Azeez, Deputy CEO of Anand Rathi Wealth, said on NDTV Profit:

“The paper is not about cutting costs alone—it’s about transparency. In the long run, this is a positive move for investor trust and market stability.”

Industry Reactions: Mixed Sentiments

• Deepak Shenoy, CEO of Capitalmind, commented on X (formerly Twitter):

  “The brokerage piece is the most impactful. It reduces leakage but could hurt smaller AMCs that rely on brokers heavily.”

• Anil Singhvi, Managing Editor of Zee Business, analyzed that large fund houses may face short-term pain, but investors stand to gain from more efficient fee structures.

• Reuters noted that Indian asset managers reacted with “caution and concern” as the regulatory paper came despite “earlier assurances of minimal immediate impact.”

Investor Perspective: What Does It Mean for You?

For retail and institutional investors, SEBI’s proposed changes translate to:
✅ Lower overall fund management costs.
✅ More transparent expense breakdowns.
✅ Better alignment between fund performance and fees.
✅ Streamlined KYC and onboarding.

However, investors should also expect:
⚠️ Short-term volatility in AMC shares.
⚠️ Possible restructuring of existing schemes.
⚠️ New models of performance-linked returns that may alter fee predictability.

Timeline and Next Steps

• Public comments on the proposals are open until November 17, 2025.

• SEBI will review industry feedback and likely issue final guidelines by early 2026.

• AMCs will be required to implement the changes in phases to ensure minimal disruption.

Conclusion

SEBI’s proposed overhaul of the mutual fund fee structure marks a historic step toward making India’s mutual fund industry more transparent, competitive, and investor-friendly.

While the short-term market reaction has been negative, the long-term vision aligns with global best practices—reducing hidden costs, encouraging accountability, and ensuring that investors get the maximum value for every rupee invested.

As the consultation period continues, stakeholders across the financial ecosystem—AMCs, distributors, and investors—will be keenly watching how SEBI fine-tunes its proposals for a fairer and more efficient future of mutual fund investing in India.