The Securities and Exchange Board of India (Sebi) has ushered in a new era of transparency and cost efficiency for mutual fund investors. On Wednesday, 18 December 2025, the market regulator announced a comprehensive set of regulations that will reshape how mutual funds charge their investors. The changes, which focus heavily on expense structures and disclosures, are designed to give investors a clearer picture of where their money is going.
Decoding the New Expense Ratio Framework
At the core of Sebi's reforms is a complete overhaul of the expense ratio system. To eliminate confusion, Sebi has introduced a new Base Expense Ratio (BER). Crucially, all statutory charges like Securities Transaction Tax (STT), Goods and Services Tax (GST), stamp duty, and exchange fees will now be separated from this base figure. These levies will be charged based on actuals and displayed distinctly on statements.
This means an investor's total cost, or Total Expense Ratio (TER), will now have four transparent components: the base expense ratio, brokerage, regulatory levies, and statutory levies. Muthukrishnan Dhandapani, a certified financial planner based in Chennai, welcomed the move, stating it offers marginal savings and significantly improves transparency for investors.
Lower Caps and Revised Brokerage Limits
Sebi hasn't stopped at just improving transparency; it has also actively reduced the permissible costs. The regulator has lowered the base expense limits across virtually all mutual fund categories.
Key reductions include:
- Index Funds and ETFs: Down to 0.9% from 1%.
- Fund-of-Funds (FoFs) with over 65% equity: Down to 2.10% from 2.25%.
- Other Fund-of-Funds: Down to 1.85% from 2%.
For equity-oriented schemes, the cuts are calibrated based on the fund's size. For instance, schemes with assets up to ₹500 crore will see their base expense cap fall to 2.10% from 2.25%. Large schemes managing over ₹50,000 crore will have a cap of just 0.95%, reduced from 1.05%.
In a parallel move, Sebi has also slashed brokerage costs that Asset Management Companies (AMCs) can incur. The new caps are set at 6 basis points (bps) for cash market trades and 2 bps for derivatives, exclusive of levies. Additionally, the extra 5 bps charge that could be applied over exit loads has been scrapped entirely.
Implementation and Broader Impact
These sweeping changes are scheduled to take effect on 1 April 2026, giving the mutual fund industry a three-month transition period. Beyond costs, Sebi has simplified several compliance norms, including streamlining reporting and easing borrowing rules for index funds and ETFs to aid operational efficiency.
For the average investor, the immediate impact on their statement might not be a dramatic slash in the headline number, as statutory taxes will now be shown separately. However, the long-term benefits are substantial. Lower base expense caps, tighter brokerage controls, and the elimination of bundled charges will enforce greater cost discipline on fund houses.
Ultimately, the reforms empower investors with a clean, itemized bill for their mutual fund investments. This newfound clarity will make comparing different funds more meaningful and lead to more informed investment decisions, strengthening the foundation of trust in India's growing mutual fund landscape.
