SEBI Proposes Performance-Based Mutual Fund Fees

The Securities and Exchange Board of India (SEBI) has unveiled a significant proposal to revamp the mutual fund (MF) fee structure, aiming to link fund expenses with scheme performance. This initiative is part of a broader effort to enhance cost transparency and align fund manager incentives with investor interests across India’s Rs 75 lakh-crore mutual fund industry.

Performance-Linked Expense Ratios: A First in India

Under the draft regulations, SEBI has introduced the concept of “performance-linked expense ratios.” This mechanism allows asset management companies (AMCs) to charge variable fees based on the performance of their mutual fund schemes. Adoption of this model will be voluntary, giving AMCs the flexibility to opt in or continue with the existing fixed-fee structure.

SEBI emphasized that a comprehensive framework will be finalized after consultations with industry stakeholders, ensuring fair and effective implementation. The regulator noted that this approach is designed to tie fund manager earnings more closely to investor returns, replacing the traditional fixed-charge model with a performance-based cost system. This marks the first time SEBI has proposed such a model for mutual funds in India.

Reducing Brokerage and Transaction Costs

In addition to performance-linked fees, SEBI has proposed substantial reductions in brokerage and transaction charges for mutual fund trades. The consultation paper highlighted that fund houses often double-charge investors for research services—once through fund management fees and again via bundled brokerage payments.

To address this, SEBI suggested lowering the brokerage cap from 12 basis points (bps) to 2 bps on cash market transactions and from 5 bps to 1 bp on derivatives trades. These limits will apply strictly to brokerage costs, while all other trade execution expenses may continue to be charged on an actual-cost basis. Statutory levies, including Securities Transaction Tax (STT), Goods and Services Tax (GST), and stamp duty, will remain outside the expense ratio, ensuring that changes in statutory rates are passed directly to investors without inflating fund costs.

The regulator observed that equity schemes often incur higher brokerage than arbitrage funds due to bundled research and advisory services included in brokerage charges. By imposing new caps, SEBI aims to remove ambiguity, enhance transparency, and prevent multiple charges for the same service.

Broader Reforms to Strengthen Mutual Fund Regulations

The proposed changes are part of SEBI’s comprehensive review of mutual fund regulations, aimed at simplifying compliance, improving investor protection, and eliminating redundant provisions from the nearly three-decade-old framework.

Additional proposals include:

• Clearer disclosure of total expense ratios
• Rationalization of fund operating costs
• Streamlined responsibilities for trustees

Public Consultation and Next Steps

SEBI has invited public comments on these proposals until November 17, 2025, before finalizing the new rules. The regulator aims to create a more transparent, performance-driven, and investor-friendly mutual fund ecosystem through these reforms.

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Sorit Chaudhary

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