- 1. A New Way to Calculate Costs (BER vs. TER)
- 2. Revised Expense and Brokerage Limits
- 3. Understanding the Impact with Examples
- 4. Simplification of Rules
- Conclusion
On December 17, 2025, the Securities and Exchange Board of India (SEBI) approved the SEBI (Mutual Funds) Regulations, 2026. These new rules will replace the existing regulations that have been in place since 1996.
The objective of these changes is to simplify the rules, improve transparency regarding costs, and rationalise the fees charged to investors. Here is a breakdown of what has changed and how it might affect your investments.
1. A New Way to Calculate Costs (BER vs. TER)
The most significant change is in how the "Total Expense Ratio" (TER), the cost you pay to the mutual fund, is structured.
Previously, the TER was a single percentage cap that included management fees, operating costs, and various taxes. Under the new 2026 regulations, SEBI has separated these components to provide more clarity.
The New Formula:
Total Expense Ratio = Base Expense Ratio (BER) + Brokerage + Regulatory Levies + Statutory Levies
- Base Expense Ratio (BER): This is the core fee for managing the fund.
- Statutory Levies: Taxes and charges like GST, Securities Transaction Tax (STT), and Stamp Duty will now be charged on "actuals" (the exact amount incurred) over and above the brokerage limits.
- Brokerage: The cost incurred by the fund when buying or selling stocks.
What does this mean?
It forces a separation between the "fee" paid to the fund manager and the "tax" paid to the government. This restructuring aims to make disclosures more honest and comparisons between funds more meaningful.
2. Revised Expense and Brokerage Limits
SEBI has reduced the maximum limits for expenses and transaction costs in several categories.
Lower Base Expense Ratio (BER) Limits:
- Index Funds & ETFs: The limit has been reduced from 1.00% to 0.90%.
- Fund of Funds (Equity-oriented): Reduced from 2.25% to 2.10%.
- Close-ended Equity Schemes: Reduced from 1.25% to 1.00%.
Rationalised Brokerage Limits:
When a mutual fund buys or sells shares, it pays a brokerage fee. SEBI has significantly lowered the cap on these costs:
- Cash Market Transactions: Limit reduced from 12 bps to 6 bps (0.12% to 0.06%).
- Derivative Transactions: Limit reduced from 5 bps to 2 bps (0.05% to 0.02%).
Removal of Additional Allowance:
Previously, funds were allowed to charge an extra 0.05% (5 basis points) for schemes that had exit loads. This allowance has been removed.
3. Understanding the Impact with Examples
While a reduction of 0.10% or 0.15% may appear small, it can have a noticeable impact on long-term investments due to compounding.
Example 1: The Long-Term Impact of Lower Fees
Let’s assume an investor puts a lump sum of ₹10 Lakh into an equity fund for 20 years. The fund generates a gross return of 12% per year.
- Scenario A (Old Expense): Expense Ratio is 2.00%.
- Net Return: 10.00%
- Final Value: ₹67.3 Lakhs
- Scenario B (New Expense): Expense Ratio is 1.90% (a 0.10% reduction).
- Net Return: 10.10%
- Final Value: ₹69.0 Lakhs
The Difference: A 0.10% reduction in fees results in approximately ₹1.7 Lakhs in extra returns over 20 years.
Example 2: Active vs. Passive Funds
The new regulations lower costs for both active funds and passive funds (Index Funds). However, the cost gap remains significant.
- Active Fund: Estimated BER ~1.8% (plus levies).
- Index Fund: Estimated BER ~0.3% to 0.5% (plus levies).
While active funds have become slightly cheaper, index funds generally remain the lower-cost option.
4. Simplification of Rules
Apart from financial changes, SEBI has streamlined the regulatory text to make compliance easier for fund houses.
- Reduced Volume: The regulations have been cut down from 162 pages to 88 pages.
- Deletions: Obsolete chapters, such as those on Real Estate Mutual Funds and Infrastructure Debt Funds (which have separate frameworks), have been removed.
Conclusion
The SEBI (Mutual Funds) Regulations, 2026, represent a structural shift towards transparency. By unbundling taxes from fees and lowering brokerage caps, the regulator aims to ensure that investors have a clearer picture of what they are paying for. While the immediate reduction in headline fees may seem modest in some cases, the removal of additional allowances and lower transaction costs can contribute to better net returns over the long term.
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