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SEBI Shakes Up Mutual Funds: 5 BPS Cushion Scrapped Amid TER Revisions

SEBI has proposed significant changes to mutual fund expense structures in its latest consultation paper. The regulator wants to remove the additional 5 bps expense allowance previously granted to asset management companies. To balance this impact, SEBI suggests increasing the first two Total Expense Ratio slabs by 5 basis points each. These proposals reflect SEBI's ongoing efforts to enhance transparency and align fund costs more closely with investor interests.

Key Points: SEBI Proposes Removing 5 BPS AMC Cushion Revises TER

  • SEBI proposes eliminating 5 bps expense cushion introduced after exit load changes
  • First two TER slabs increased by 5 bps to balance AMC operational impact
  • Statutory levies like STT and GST to be excluded from TER framework
  • Brokerage costs slashed from 12 bps to 2 bps for cash market trades
2 min read

SEBI plans to scrap 5 bps AMC cushion, revise TER slabs to maintain balance: Report

SEBI plans to scrap 5 bps expense allowance for AMCs while adjusting TER slabs. New proposals aim to enhance transparency and protect investor interests in mutual funds.

"SEBI has proposed a steep reduction in the permissible brokerage and transaction costs - Centrum Capital Markets Report"

New Delhi, October 30

The Securities and Exchange Board of India (SEBI) has proposed removing the additional 5 basis points (bps) expense allowance earlier granted to asset management companies (AMCs). The regulator has, however, proposed a 5 bps increase in the first two Total Expense Ratio (TER) slabs to partly balance the impact on AMC operations. The proposals form part of SEBI's latest consultation paper, which invites public comments until November 17, 2025, as per Centrum's Capital Markets report.

The additional 5 bps cushion was initially introduced after SEBI directed that exit load proceeds be credited back to mutual fund schemes. Now, by eliminating this leeway, SEBI seeks to rationalise expenses further and enhance disclosure standards. According to the report, the regulator's simultaneous upward revision of the first two TER slabs is designed to maintain operational stability for fund houses. The move underscores SEBI's ongoing effort to make fund costs more transparent and aligned with investors' interests.

To deepen cost clarity, SEBI has also proposed that statutory levies such as Securities Transaction Tax (STT), Goods and Services Tax (GST), Commodities Transaction Tax (CTT), and stamp duty be kept outside the TER framework. Currently, only GST on management fees is excluded. With this shift, TER limits will be revised downward by about 15-20 bps, which Centrum's report notes will make the move largely neutral for AMCs. The reduction matches the value of costs now excluded from TER, ensuring limited effect on profitability.

"SEBI has proposed a steep reduction in the permissible brokerage and transaction costs that can be charged to mutual fund schemes -- from 12 bps to 2 bps for cash market trades and from 5 bps to 1 bps for derivatives transactions," the report noted.

The consultation paper also suggests several governance and procedural changes. AMCs may be allowed to link expense ratios to scheme performance on a voluntary basis. Expenses from new fund offers must now be borne by the AMC, trustees, or sponsors, not by investors. Additionally, trustee meetings may be held quarterly instead of every two months to ease administrative requirements while maintaining oversight.

SEBI has also proposed a "Mutual Fund Lite" framework to simplify regulations for passive products like index funds and ETFs. Centrum's report highlights that MF Lite entities would benefit from reduced compliance and capital needs, encouraging competition and lowering costs for investors.

- ANI

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Reader Comments

R
Rohit P
As someone who invests regularly in mutual funds, I appreciate SEBI's efforts to make costs more transparent. The exclusion of statutory levies from TER will give us a clearer picture of actual fund management costs.
A
Arjun K
While I support cost reduction, I'm concerned about how AMCs will maintain service quality with lower revenues. The brokerage cost cuts seem quite steep - from 12 bps to just 2 bps. Hope this doesn't impact research quality.
S
Sarah B
The Mutual Fund Lite framework is a brilliant move! This will encourage more competition and innovation in passive funds. As an NRI investor, I'm excited to see India's mutual fund industry becoming more efficient and investor-friendly.
V
Vikram M
Linking expense ratios to performance on voluntary basis is interesting. Hope AMCs adopt this to show confidence in their fund management capabilities. This could be a game-changer for investor trust.
M
Michael C
Quarterly trustee meetings instead of bimonthly makes sense - reduces compliance burden without compromising oversight. SEBI seems to be striking a good balance between regulation and operational efficiency.

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