SEBI’s proposal to changes to mutual fund fee structures, including the total expense ratio (TER) and the brokerage fee, will significantly reduce the profit margins of fund houses and hurt brokers even as it brings benefits to investors.
The market regulator, in a consultation paper issued on Tuesday, has proposed to remove the additional 5 basis points (bps) that mutual fund houses were allowed to charge across their schemes. The Total Expense Ratio the fee deducted from assets under management (AUM) to cover management and operating expenses. This is charged in slabs based on the size of the AUM.
According to a note by brokerage firm Jefferies, the removal of the 5 bps allowance previously granted to offset exit-load credits would directly hurt AMC margins. This additional 5 bps accounted for a steady source of revenue across equity schemes, and its withdrawal would leave a visible dent in earnings. Jefferies expects the move to lower TER, removal of exit load charges and lower brokerage fees will together reduce profit before tax by 8-10 per cent for major listed companies such as HDFC AMC and Nippon India AMC in FY27.
However, smaller funds may not be impacted much because SEBI has proposed a new 5 bps upward revision in the TER of first two slabs of active open-ended schemes. MFs levy expenses on the basis of assets under management. For AUM upto ₹500 crore, MFs can charge 2.5 per cent for active funds and 2 per cent for passive funds and between ₹500 crore and ₹700 crore of AUM the TER is fixed at 2 per cent and 1.75 per cent for passive funds. Similarly, the TER reduces across 3 slabs as AUM grows.
Puneet Singhania, Director, Master Trust Group, said while the move may exert pressure on fund houses—particularly large AMCs with substantial AUMs — by compressing profit margins, it encourages greater operational discipline and transparency. Smaller and newer AMCs may face challenges in sustaining distributor pay-outs and marketing efforts. However, the overall reform aligns the industry with global best practices, ensuring a more investor-centric and competitive landscape, he said.
The impact of reduction in brokerage charges will be minimal and can be reworked because the volume of transactions has also gone up manifold, he said.
DP Singh, Deputy Managing Director, SBI Funds Management, said the consultation paper is investor-centric and the proposed cut in TER will have a marginal impact as the AUM of industry has also gone up substantially ever since it was last revised.
More transparency
The consultation paper issued by market regulator SEBI may to lead to mutual funds reducing the total expense ratio they charge on the funds by 15-20 basis points.
It will also lower the brokerage paid for cash equity trades from 12 bps to 2 bps. The removal of statutory levies from TER will bring more transparency on the charges levied by the fund houses.
Sandeep Bagla, CEO, TRUST Mutual Fund, said the proposal appears slightly positive for the smaller fund houses as the proportionate of fees charged and commission paid will decrease more for larger schemes and hence impact bigger fund houses more.
While investors will benefit as their returns will go up, he said in all probability AMCs will minimise the impact of lower charges by reducing the distributors commissions.
SEBI has also proposed a voluntary performance-linked TER mechanism which will enable AMCs to balance their expenses with the scheme’s performance.
Move to lower TER is a constructive step toward enhancing investor value and fostering greater cost efficiency within the mutual fund industry, said Singhania.
Lower expenses will directly improve net returns for investors, reinforcing confidence in mutual fund products as a long-term wealth creation avenue, he added.
One of the most significant proposals is the removal of the additional 5 basis points (bps) charge that mutual funds can currently levy on schemes with exit loads.
Leading global broking firm Jefferies said mutual funds are likely to seek a balancing act on SEBI proposal and may attempt to pass on 60-70 per cent of the impact with distributors and other ecosystem players.
By keeping the statutory levies such as GST and STT out of TER will allow fund houses to pass on future changes in statutory costs directly to investors, said Jefferies.
The consultation paper has also proposed operational changes, including revised disclosure norms for TER, differential expense ratios based on fund performance, and clearer segregation of non-pooled businesses.