SEBI Proposes Mutual Fund Cost Reforms for Greater Investor Transparency and Lower Expenses

The Securities and Exchange Board of India (SEBI) has issued a consultation paper detailing proposed amendments to the SEBI (Mutual Funds) Regulations, 1996. The primary focus is on rationalizing costs and enhancing transparency within mutual fund schemes.

Key proposals include the removal of the transitory additional expense of 5 basis points (bps) on AUM permitted since 2018. To maintain operational viability for Asset Management Companies (AMCs), the first two TER slabs for open-ended active schemes will be increased by 5 bps.

A significant change is the exclusion of all statutory levies, such as STT, CTT, GST, and stamp duty, from TER limits. These costs will now be disclosed separately, ensuring investors are aware of the direct charges. Consequently, base TER limits are being reduced as GST on non-management expenses will be excluded.

SEBI is also pushing for a unified and transparent TER disclosure system. AMCs will be required to clearly define TER, including management fees, brokerage, transaction costs, exchange/regulatory fees, and statutory levies. A detailed breakup by cost head will be mandatory for improved investor clarity.

Brokerage and transaction cost caps are proposed to be sharply reduced – from 12 bps to 2 bps for the cash market and from 5 bps to 1 bps for derivatives. Furthermore, SEBI mandates the separation of execution and research costs, preventing bundled research services.

An optional differential TER framework, linked to fund performance, is also suggested, aligning AMC incentives more closely with investor outcomes.

Additionally, all New Fund Offer (NFO)-related expenses until unit allotment must be borne by the AMC, trustee, or sponsor, and not charged to the scheme.

Impact These proposed changes aim to significantly reduce the overall costs for mutual fund investors, increase transparency in the operational expenses of funds, and better align the interests of Asset Management Companies with the performance experienced by investors. This could lead to improved net returns for investors and necessitate adjustments in the cost structures of AMCs. Rating: 7/10.

Definitions: SEBI: Securities and Exchange Board of India, the regulator for the securities market in India. Consultation Paper: A document issued by a regulator to solicit public feedback on proposed policy changes. Mutual Funds: Investment vehicles that pool money from many investors to invest in a diversified portfolio of securities. Brokerage Costs: Fees paid to brokers for executing buy and sell trades. Total Expense Ratio (TER): An annual fee charged by mutual funds to cover operating expenses, expressed as a percentage of assets managed. AUM: Assets Under Management, the total market value of investments managed by a financial institution. Basis Points (bps): A unit of measure equal to 0.01% (1/100th of a percent). Open-ended active schemes: Mutual funds that continuously issue and redeem units at Net Asset Value (NAV) and aim to outperform a benchmark index. Asset Management Companies (AMCs): Firms responsible for managing mutual funds. Statutory Levies: Taxes and duties imposed by the government on financial transactions, such as STT, CTT, GST, and stamp duty. NFO: New Fund Offer, the initial period when a mutual fund scheme is available for investment.