SEBI's New Mutual Fund Rules: What You Need to Know

Investing in mutual funds is a popular way for many to grow their wealth. To make this process even better for investors, the Securities and Exchange Board of India (SEBI) has proposed some significant changes to its mutual fund rules. These proposals aim to make investing more affordable, clearer, and easier to understand.

SEBI has released a document titled the "Consultation Paper on Comprehensive Review of SEBI (Mutual Funds) Regulations, 1996," and is inviting public comments until November 17, 2025. Let's break down what these potential changes mean for you.

Key Changes Proposed by SEBI

Here’s a look at the main proposals that could impact mutual fund investors:

1. No More 5 BPS Charge on Schemes

Currently, mutual fund companies can charge an extra 5 basis points (0.05%) on schemes, especially those with exit loads. This charge was initially introduced to manage the impact of exit loads being credited back to the schemes. SEBI now proposes to remove this additional charge.

2. Lower Brokerage Fees

SEBI wants to significantly reduce the maximum brokerage fees that mutual funds pay for buying and selling investments. For cash market transactions, the cap could drop from 12 basis points to just 2 basis points. For derivatives transactions, it could go from 5 basis points to 1 basis point.

3. New Rules for Total Expense Ratio (TER)

The Total Expense Ratio (TER) is what you pay annually to manage your fund. SEBI suggests that the TER should no longer include costs like brokerage fees and various taxes (like STT, GST, CTT, and Stamp duty). Instead, these costs would be shown separately.

4. Performance-Based Expense Ratio

SEBI is also looking at allowing mutual funds to charge fees based on how well a scheme performs. This means if a fund does exceptionally well, investors might pay a bit more, but only when it delivers better returns than its benchmark.

5. Reduction in TER for Specific Schemes

For certain types of funds, SEBI proposes a direct cut in their TER:

• Index Funds and ETFs (Open-ended): The TER could be reduced from 1% to 0.85%.
• Fund of Funds (FoFs) investing in liquid schemes, index funds, or ETFs: A similar reduction is proposed.
• FoFs investing at least 65% in equity schemes: Their TER could drop from 2.25% to 2.10%.
• Other FoFs: A reduction from 2% to 1.85% is suggested.

Beyond these financial changes, SEBI also aims to simplify rules for fund sponsors, make investor communications more digital (like annual reports), and remove outdated regulations. They also want to make compliance easier for fund houses by reducing mandatory trustee meetings and replacing newspaper ads with online disclosures.

What These Changes Could Mean for You

These proposed changes are designed with the investor in mind, offering several potential benefits:

• Lower Costs: By removing the 5 bps charge and cutting brokerage fees, you could end up paying less in overall charges, which means more of your money stays invested and grows.
• Greater Transparency: The new TER rules, which separate brokerage and taxes, will give you a clearer picture of all the costs involved in your investment. You'll know exactly what you're paying for.
• Better Returns: With lower expenses and clearer charges, your net returns from mutual funds could potentially increase.
• Fairer Fees: The option for performance-based expense ratios means you would pay higher fees only when your fund delivers superior returns, aligning your interests more closely with the fund manager's.

Conclusion

SEBI's new proposals represent a significant step towards making the mutual fund industry more investor-friendly. By focusing on reducing costs, increasing transparency, and simplifying regulations, these changes, if implemented, could lead to a more efficient and beneficial investing experience for everyone. It's a good time for investors to stay informed about these developments and understand how they might impact their financial journey.
 

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