SEBI proposes performance-linked expense ratios, sharp cut in mutual fund brokerage charges

NEW DELHI: The Securities and Exchange Board of India (SEBI) has proposed a major overhaul of the mutual fund (MF) fee structure, suggesting that fund expenses could soon be linked to how well schemes perform. The move is part of a broader consultation paper aimed at aligning fund manager incentives with investor interests and improving cost transparency across the over Rs 75 lakh-crore mutual fund industry.

In the draft regulations, SEBI has introduced a provision for “performance-linked expense ratios”, allowing asset management companies (AMCs) to charge variable fees depending on the performance of their schemes. The mechanism would be voluntary, meaning AMCs can choose whether or not to adopt the model.

SEBI said a detailed framework will be finalised after consultations with industry stakeholders to ensure fair implementation. It said the initiative is intended to better align fund manager earnings with investor returns, ensuring that costs reflect actual performance rather than being fixed charges irrespective of outcomes. It is for the first time that SEBI has proposed such a performance-based cost model for mutual funds.

In another key reform, SEBI has also proposed a sharp reduction in brokerage and transaction charges permitted for mutual fund trades. The consultation paper noted that fund houses were often double charging investors for research costs, once under fund management fees and again through bundled brokerage payments.

To curb this practice, the market regulator has suggested lowering the brokerage cap from 12 basis points (bps) to 2 bps on cash market transactions and from 5 bps to 1 bp on derivatives trades These limits will apply strictly to brokerage costs, while all other trade execution expenses may be charged on actuals.

Statutory levies such as the Securities Transaction Tax (STT), Goods and Services Tax (GST), and stamp duty will remain outside the expense ratio limits, ensuring that changes in statutory rates are passed directly to investors without inflating fund costs.

SEBI noted that equity schemes were paying significantly higher brokerage compared to arbitrage funds, often due to bundled research and advisory services being included in brokerage charges. The regulator said the new caps are designed to remove ambiguity, enhance transparency, and prevent investors from paying multiple times for the same service.

The proposed reforms follow SEBI’s wider review of mutual fund regulations to simplify compliance, improve investor protection, and eliminate redundant provisions in the nearly three-decade-old regulatory framework. The paper also includes proposals on clearer disclosure of total expense ratios, rationalisation of fund operating costs, and streamlined trustee responsibilities.

The regulator has sought public comments on the proposals by November 17, 2025, before finalising the new rules. (ANI)