SEBI Proposes Major Overhaul of Mutual Fund Costs, Shifting Focus to Investor Empowerment

The Securities and Exchange Board of India (SEBI) has initiated a significant review of Mutual Fund Regulations, 1996, proposing reforms that could redefine the industry by shifting focus from product protection to investor empowerment. The proposed changes aim to enhance transparency and reduce costs for investors.

Key proposals include redefining the Total Expense Ratio (TER) to exclude brokerage, taxes, and statutory levies, giving investors a clearer picture of fund management fees. Brokerage caps are also set to be drastically reduced, from 12 basis points (bps) to 2 bps in cash markets and from 5 bps to 1 bp in derivatives. This addresses the issue of investors paying twice for research – once through management fees and again via trading commissions.

A radical proposal is an optional performance-linked expense ratio, where fund houses can earn higher fees only if they outperform benchmarks. This would align incentives, moving towards a "value-for-fee" model rather than "fee-for-assets," rewarding skill over scale.

SEBI also plans to rewrite regulations in plain language and digitise disclosures. This move aims to make financial rules easier for citizens to understand.

**Impact**: These reforms are expected to lead to substantial cost savings for investors, potentially adding significant wealth over the long term. However, they may also reduce commissions for intermediaries, potentially pushing them towards higher-margin, less transparent products like Portfolio Management Services (PMS) and Alternative Investment Funds (AIFs). SEBI's next challenge will be to extend similar disclosure and suitability norms to these products.

In contrast, the article highlights that the Insurance Regulatory and Development Authority of India (IRDAI) continues to manage Unit-Linked Insurance Plans (ULIPs) with layered costs and complexity, making them appear more profitable than they are after all deductions. The advice for investors is to use term insurance for life cover and mutual funds for wealth creation.

The reforms aim to foster trust by making costs visible and shifting rewards towards outcomes, potentially transforming Indian finance into a more investor-centric system. For this to succeed, SEBI needs to ensure uniform disclosure and suitability standards across all investment products and coordinate with other regulators like IRDAI and PFRDA.

**Rating**: 9/10

**Difficult terms and their meaning:**

* **Total Expense Ratio (TER)**: This is the maximum annual fee that a mutual fund scheme can charge its investors. It includes management fees, administrative costs, and other expenses. * **Liberalisation**: In an economic context, it refers to the easing of government restrictions and regulations, promoting economic growth and market freedom. * **Open-ended schemes**: Mutual fund schemes that are available for purchase and redemption continuously throughout the year. Their size can grow or shrink based on investor demand. * **Brokerage**: A fee paid to an intermediary (broker) for buying or selling securities on behalf of an investor. * **Basis points (bps)**: A unit of measure used in finance to denote the percentage change in a financial instrument. 1 basis point is equal to 0.01% or 1/100th of a percent. * **Cash markets**: Markets where financial instruments like stocks and bonds are traded for immediate delivery. * **Derivatives**: Financial contracts whose value is derived from an underlying asset, such as stocks, bonds, commodities, or currencies. Examples include futures and options. * **Performance-linked expense ratio**: An expense structure where fund management fees are tied to the scheme's performance against a benchmark or target. * **Value-for-fee**: A model where investors pay fees based on the tangible value or performance delivered by the service provider. * **Fee-for-assets**: A model where fees are charged based on the total assets under management, regardless of performance. * **Statutory levies**: Taxes and duties imposed by government bodies, such as Goods and Services Tax (GST), stamp duty, or Securities Transaction Tax (STT). * **GST (Goods and Services Tax)**: A consumption tax imposed on the supply of most goods and services in India. * **Stamp duty**: A tax levied on certain legal documents and transactions, such as property transfers or share sales. * **STT (Securities Transaction Tax)**: A tax levied on the transaction value of securities (like shares) traded on Indian stock exchanges. * **Portfolio Management Services (PMS)**: Discretionary or non-discretionary investment management services offered to high-net-worth individuals. * **Alternative Investment Funds (AIFs)**: Pooled investment vehicles that include hedge funds, private equity funds, and venture capital funds, which are typically not registered under existing SEBI mutual fund regulations. * **Structured notes**: Complex financial instruments that combine elements of traditional securities (like bonds) with derivatives. * **Unit-Linked Insurance Plans (ULIPs)**: Insurance products that combine life insurance with investment options, where a portion of the premium is invested in market-linked funds. * **Net Asset Value (NAV)**: The per-share market value of a mutual fund or ETF. It is calculated by dividing the total value of the fund's assets by the number of outstanding shares. * **Mortality charges**: Fees charged by insurance companies in ULIPs to cover the life insurance component of the policy. * **Administrative charges**: Fees deducted by insurance companies for managing the policy and its associated services. * **Standalone term plans**: Pure life insurance policies that provide coverage for a fixed period without any investment or savings component. * **Surrender penalties**: Fees charged if a policyholder terminates or cancels an insurance policy before its maturity. * **Portability**: The ability of a customer to retain their existing policy number and benefits while switching to a new provider, often applicable in insurance. * **Fiduciary**: A person or entity that has a legal or ethical relationship of trust with another party and is obligated to act in that party's best interests. * **PFRDA (Pension Fund Regulatory and Development Authority)**: The statutory body that regulates pension funds in India, overseeing schemes like the National Pension System (NPS). * **Distributors**: Individuals or entities that sell financial products, such as mutual funds or insurance policies, on behalf of fund houses or companies.