Authors: Chandrasekar V and Manasa Krishnan
For the average retail investor, an SIP debit arrives every month like clockwork. What doesn’t arrive with the same clarity is an explanation of the line that quietly eats into returns: the expense ratio. That small number has long served as a convenient shorthand for a range of charges – recurring fund management costs, statutory levies, or brokerage passes. For the average retail investor, an SIP debit arrives every month like clockwork. What doesn’t arrive with the same clarity is an explanation of the line that quietly eats into returns: the expense ratio. That small number has long served as a convenient shorthand for a range of charges – recurring fund management costs, statutory levies, or brokerage passes. SEBI’s October 2025 consultation paper aims to change that. The regulator is moving from a bundled, product-centric model to a clearer, investor-centric pricing framework. The proposal seeks to unbundle the Total Expense Ratio (TER), introduce performance-linked fees, and implement new guardrails for AMCs.
The nuts and bolts of the consultation paper
• TER will reflect only fund-running costs, with lower caps across scheme types and AUM slabs.
• GST, securities transaction tax, stamp duty and similar charges will be shown and charged separately.
• The transitory 5 bps exit-load allowance is proposed for removal, replaced by modest recalibration of initial TER slabs.
• The proposal suggested 2 bps for cash and 1 bp for derivatives; however, SEBI may revise caps after feedback.
• AMCs may link a portion of fees to outperformance under guardrails.
• AMCs (or subsidiaries) may advise non-pooled vehicles such as family offices and institutional mandates, subject to governance safeguards.
What does SEBI hope to achieve? A mutual-fund statement should resemble a restaurant bill: every charge itemised. That is the practical logic behind SEBI’s push; showing the kitchen cost (fund management), the tip (distribution/commission), and the taxes and levies separately. That simple accounting change has three major effects:
• Comparability: Separating statutory levies and transaction costs from TER enables direct, apples-to-apples comparison of fund-management fees across schemes.
• Accountability: Properly designed performance-linked fees align manager compensation with realised outperformance through mechanisms (e.g., hurdle rates).
• Market response: Clearer, lower headline fees increase competitive pressure on AMCs, forcing them to either reduce genuine operating costs or develop transparent alternative revenue streams.
Is there a price to pay for the industry?
India’s mutual fund industry manages a massive pool of ~₹75 lakh crore. That scale means small basis-point moves translate into substantially less revenues per year.
The magnitude of this loss explains why the consultation paper has triggered strong reactions from AMCs and distributors. What appears to be a small tweak on paper is, in reality, an industry-level transfer of economics. And the impact isn’t uniform. Large AMCs, especially those with a heavy tilt toward actively managed retail equity funds, feel the squeeze more because their revenue is directly linked to TER fees. A 10-25 bps haircut on their highest-margin products materially compresses profits. In contrast, smaller or niche AMCs with alternative fee streams (advisory mandates, family office portfolios) are relatively insulated.
Who really stands to gain from this move?
For investors, this is a clear win:
Clear separation of charges makes headline charges harder to hide inside a bundled TER. When every rupee is attributed to a specific cost, underperforming or expensive schemes lose the advantage of opacity. This shifts power from manufacturers to investors, as product selection now becomes data-led, and not narrative-fed.
For AMCs, this puts pressure on their strategy:
Firms reliant on active retail funds face basis-point compression and elevated transition costs. Multiple scheme classes, legacy reporting systems and complex distribution arrangements make reclassification costly and slow. That said, the paper does offer two proverbial carrots to these AMCs:
(1) Diversification into permitted advisory services for non-pooled mandates and
(2) Product redesign, such as performance-oriented share classes
This change does, however, present an opening for smaller AMCs. Lean managers with specialized strategies may benefit from standardized slabs that allow scale benefits to flow to investors while preserving differentiation. If performance-linked fees are structured to reward genuine skill, nimble managers can monetize measurable value rather than AUM scale.
For distributors and brokers, the entire distribution model is in flux:
Proposed brokerage caps threaten a material revenue line for institutional brokers and may prompt distributors to reallocate effort toward higher-margin, less-regulated products such as portfolio management services and alternative investment funds. This could nudge existing distribution economics toward fee-based models. SEBI’s willingness to consider industry feedback on brokerage caps is therefore material.
A reset, not a tweak
For years, the industry has operated with a convenient blur between what investors pay for skill and what they pay for friction. The TER has bundled everything: management fees, brokerage, even statutory levies. The new framework forces that blur into focus, making costs traceable. Some parts of the industry will feel this more sharply than others. Large fund houses have built comfortable margins on scale and a steady TER annuity. Distributors and brokers on the other hand have benefitted from economics hidden inside the bundle. For them, this shift is uncomfortable because it exposes the real price of distribution and execution. The optional performance-linked fee structure is particularly interesting. It signals a philosophical shift – to charge more only when actual value is created. The early noise from the ecosystem is exactly what one would expect. Smaller AMCs and investor groups have welcomed the transparency. For the larger houses and brokers, fears about margin compression and implementation complexity loom large. SEBI opening the door to feedback suggests the final version may soften some edges, but the direction of travel is clear.
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