In a significant move poised to benefit millions of Indian investors, the Securities and Exchange Board of India (Sebi) has proposed a major overhaul of mutual fund cost structures. The core of the reform is a reduction in the Total Expense Ratio (TER), a change that, while seemingly minor in percentage terms, promises to unlock substantial long-term wealth for retail participants.
The High Cost of Sticky Fees in a Booming Industry
India's mutual fund landscape has witnessed phenomenal growth over the last decade. Assets under management have soared from approximately ₹13 trillion to nearly ₹799 trillion. Concurrently, investor folios have expanded almost sixfold, jumping from 39 million to over 230 million, fueled by digital penetration and the systematic investment plan (SIP) culture.
However, as the industry scaled, one critical component did not shrink proportionally: the cost to the investor. Total Expense Ratios for many equity-oriented schemes have remained stubbornly close to regulatory ceilings, despite technological advancements that lowered operational and distribution costs. These persistent fees silently erode the compounding potential of an investor's portfolio over time.
Decoding Sebi's Cost-Rationalisation Proposal
In a consultation paper released on 28 October 2025, Sebi outlined a framework designed to create a more transparent and investor-friendly fee structure. The key proposals include lowering the TER caps, such as reducing the ceiling for equity funds from 2.25% to 2.10%. The regulator also plans to remove the additional 5 basis points permitted on exit loads and impose stricter limits on brokerage and distribution charges.
A crucial transparency measure is the separation of statutory levies like GST and stamp duty from the TER cap. This will allow investors to see precisely what portion of their money is going towards fund management versus government taxes.
The impact of even a modest reduction is profound. Consider an investor with a monthly SIP of ₹10,000 in an equity fund over five years, totaling an investment of ₹6 lakh. A mere 5-basis-point (0.05%) difference in TER—from 2.00% to 1.95%—can generate an extra ₹1,500 to ₹2,000 for that single investor. Scaled across millions of SIP accounts, the annual industry-wide savings run into several thousand crores of rupees.
Why Every Fraction of a Percentage Point Matters
The expense ratio is the annual fee charged by a fund house, covering management, administration, and distribution costs. Expressed as a percentage, a TER of 2% means ₹2 is deducted for every ₹100 invested each year. The power of compounding magnifies this drain over decades.
A stark example illustrates the point: two investors each put ₹1 lakh in similar large-cap funds. One fund charges a 0.4% TER, while the other charges 2.4%. Assuming an identical gross annual return of 10%, the investor in the higher-cost fund would be nearly ₹43,000 poorer at the end of ten years. This demonstrates how seemingly tiny fees dramatically reshape long-term wealth outcomes.
Currently, individual investors bear the brunt of higher costs, accounting for over 87% of equity scheme assets. While direct plans have offered some relief, a wide disparity persists. In the large-cap category alone, direct-plan TERs can range from 0.4% to 2.34%, a gap that significantly alters future portfolio value.
Global Context and the Shift Towards Passive Investing
Globally, fund costs have been on a steady downward trajectory driven by competition and scale. In the United States, the average equity mutual fund expense ratio has plummeted by 62% since 1996, settling around 0.4%. Large passive index funds there often charge less than 0.10%. India, in comparison, remains a higher-cost market, with active equity funds frequently charging between 1.5% and 2%.
This fee pressure is quietly rebalancing the Indian market, accelerating a shift towards passive investing through index funds and ETFs. These options are gaining traction among younger, cost-conscious investors who prioritize simplicity and lower fees. Active fund managers now face increased pressure to justify their fees by delivering consistent outperformance (alpha) net of costs.
The takeaway for every mutual fund investor is clear. Before selecting a fund, scrutinize its expense ratio alongside its past performance and reputation. Always compare the direct plan with the regular plan, as direct plans typically have lower expenses. A leaner, more efficient mutual fund system, as envisioned by Sebi, strengthens investor trust and channels domestic savings more effectively into the capital markets, ultimately fulfilling the industry's core purpose of shared prosperity.
