Indian market regulator SEBI has proposed a major measure to reduce mutual fund expenses and make fee structures more transparent. A consultation paper released on Tuesday stated that fund houses will now be required to disclose upfront the full details of the charges they charge investors.

Proposal to reduce TER

SEBI has recommended a reduction in the total expense ratio (TER). This reduction is proposed to be up to 0.15% for open-ended mutual funds and up to 0.25% for closed-end schemes. The regulator clarified that brokerage, taxes, and other transaction costs will not be included in these fees but will be disclosed separately.

This move is different from SEBI’s 2023 framework, which sought to include all these charges in the TER. At that time, the proposal was controversial due to opposition from asset managers, who currently manage approximately ₹75.61 trillion (approximately $860.23 billion) of investor assets.

Regulations on brokerage fees

SEBI has also suggested stricter regulations on brokerage fees. Brokerage fees in the cash market could be reduced from 12 basis points to 2 basis points. For derivative transactions, this fee is proposed to be reduced from 5 basis points to 1 basis point. SEBI stated that asset managers may adopt a performance-linked differential fee structure, meaning fees can be determined based on fund performance. Furthermore, fund houses must ensure that any non-mutual fund business they engage in is run as a separate entity and that the responsibilities of key employees are completely separate.

Reducing mutual fund fees will directly benefit investors. Now, let’s assume an investor has invested ₹10 lakh in a mutual fund. The current total expense ratio (TER) is approximately 1.75%. If SEBI’s proposal is implemented and it is reduced by 0.15% to 0.25%, the annual savings would be as follows:

At 0.15% reduction: ₹1500 per ₹10 lakh

At 0.25% reduction: ₹2500 per ₹10 lakh

This amount may seem small, but compounding over the long term makes a significant difference. Over a 15-20 year investment, this savings can yield an additional benefit of ₹50,000 to ₹1 lakh, simply due to reduced expenses.