In a landmark move aimed at bolstering investor protection and enhancing market efficiency, the Securities and Exchange Board of India (SEBI) has unveiled a comprehensive set of reforms. The capital markets regulator announced significant reductions in the costs associated with mutual fund investments and equity trading, a decision set to directly benefit millions of retail participants.
Substantial Cuts in Mutual Fund Expense Ratios
The SEBI board, in its meeting held on June 28, approved a major reduction in the Total Expense Ratio (TER) for mutual funds. The TER is the annual fee that asset management companies (AMCs) charge investors for managing their funds. Under the new structure, the maximum permissible TER for actively managed equity-oriented schemes will be lowered. For instance, the slab for the first Rs 10,000 crore of assets will see the TER drop from 2.25% to 2.00%. Further reductions are prescribed for subsequent asset slabs.
This decision is expected to translate into substantial long-term savings for investors, as even a small percentage point reduction in fees can compound into significant retained earnings over an investment horizon. SEBI has also introduced provisions for a "per scheme" expense ratio instead of a pooled approach at the AMC level, ensuring greater transparency and alignment of costs with individual fund performance.
Capping Brokerage and Transaction Charges
In a parallel reform targeting the trading ecosystem, SEBI has moved to cap the maximum brokerage that can be charged by stockbrokers. The regulator has stipulated that brokerage charges cannot exceed 2.5% of the traded value. This measure is designed to prevent excessive charging and protect investors, particularly new entrants who may not be fully aware of prevailing fee structures.
Furthermore, SEBI has rationalised the transaction charges levied by clearing corporations. The board approved a proposal to reduce these charges, which are a component of the overall cost of executing a trade. This dual-pronged approach on both brokerage and transaction costs aims to make equity market participation more affordable and competitive.
Rationale and Expected Market Impact
The reforms are rooted in SEBI's core mandate of protecting investor interests and fostering the development of the securities market. By directly attacking the cost of investing and trading, the regulator seeks to improve the net returns for end-investors. Lower costs are historically linked to higher participation rates, as they improve the attractiveness of financial market instruments compared to traditional assets.
Industry experts anticipate that the mutual fund industry, which has seen tremendous growth in assets under management (AUM), will need to adjust its revenue models. However, the scale benefits from a larger AUM base and increased inflows from cost-sensitive investors could offset the impact of lower margins. For stockbrokers, the brokerage cap introduces a clear ceiling, promoting fair competition and preventing predatory pricing practices.
These changes underscore SEBI's proactive stance in evolving the regulatory framework in step with a maturing market. The reforms are likely to be implemented in a phased manner, with the regulator issuing detailed circulars to guide AMCs and market intermediaries on the operational aspects. For the common investor, these measures promise a more cost-effective and transparent environment for wealth creation through India's capital markets.
