India’s mutual fund industry has witnessed explosive growth, with crores of retail investors flocking to it in hopes of achieving their financial goals. As of 2025, the industry manages a staggering ₹58 lakh crore of assets, making it a cornerstone of wealth creation for the common person. However, as the industry has matured, so have concerns about its fee structures, transparency, and potential conflicts of interest. In a landmark move set to redefine the investment landscape, the Securities and Exchange Board of India (SEBI) has proposed a comprehensive overhaul of mutual fund regulations.
These proposals, which are expected to be finalized soon, aim to make investing in mutual funds more transparent, cost-effective, and investor-friendly. From rationalizing the Total Expense Ratio (TER) and introducing performance-linked fees to enforcing stricter rules on how fund houses operate, these changes will have a profound impact on your investment returns and experience. Whether you are a seasoned investor or just starting your SIP journey, understanding these new rules is crucial. This blog breaks down SEBI’s proposed mutual fund reforms and explains what they mean for you.
The Heart of the Matter: Demystifying the Total Expense Ratio (TER)
At the core of SEBI’s reforms is the Total Expense Ratio, or TER. This is an annual fee that a mutual fund house (Asset Management Company or AMC) charges to manage your money. It includes fund management fees, registrar fees, marketing expenses, and other administrative costs. This fee is deducted from the fund’s returns, meaning a higher TER directly eats into your profits. For years, investors have grappled with complex and often opaque TER structures.
SEBI’s new proposals aim to simplify and rationalize these charges. The key objective is to ensure that investors are not burdened with excessive costs and that all charges are disclosed in a clear and understandable manner. One of the most significant suggestions is to shift towards a more inclusive TER framework where all expenses, including brokerage and transaction costs, are bundled into the TER. This would prevent AMCs from charging various costs over and above the prescribed TER limits, leading to greater transparency.
Key Proposed Reforms by SEBI and Their Impact on Investors
SEBI’s consultation paper has put forth several game-changing proposals. Let’s explore the most important ones:
1. Performance-Linked Fees: Pay for Performance, Not Just Participation
This is perhaps the most revolutionary proposal. SEBI is exploring a model where a portion of the fund manager’s fee is tied to the fund’s performance. Under this “symmetrical” model, if a fund outperforms its benchmark index, the AMC can charge a slightly higher fee. Conversely, if the fund underperforms, it would have to charge a lower fee.
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Impact on Investors: This is a huge win for investors. It aligns the interests of the fund house with those of the investor. You will pay more only when the fund delivers superior returns, and your costs will decrease during periods of poor performance. It incentivizes fund managers to actively seek alpha (excess returns) rather than passively hugging the benchmark while charging active management fees. While the exact mechanism is still being debated for workability, the intent is clearly pro-investor.
2. Rationalization and Capping of TER
SEBI aims to create a more uniform TER structure across different fund categories. This includes bringing more transparency to how different slabs of assets under management (AUM) are charged. Furthermore, the regulator has proposed a sharp reduction in the cap on brokerage fees paid by mutual funds for stock market transactions, potentially lowering it from 12 basis points (0.12%) to just 2 basis points (0.02%).
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Impact on Investors: A lower TER directly translates to higher take-home returns. Even a small reduction of 0.5% in the TER can result in lakhs of rupees in additional wealth over a long investment horizon due to the power of compounding. This move will make investing in mutual funds, particularly actively managed funds, more affordable.
3. Stricter Rules on Fund Categorization and Overlap
SEBI is looking to tighten the definitions for fund categories to prevent “style drift,” where a fund deviates from its stated investment objective. For instance, a large-cap fund investing significantly in mid-cap stocks. The reforms aim to reduce the overlap in portfolios of different schemes launched by the same AMC.
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Impact on Investors: This will bring more clarity and predictability to your investments. When you invest in a large-cap fund, you can be more certain that your money is indeed being invested in large-cap stocks. It simplifies the fund selection process and prevents investors from being misled by scheme names that don’t reflect the underlying portfolio.
4. Ring-Fencing of Non-Mutual Fund Activities
Many AMCs also run other businesses like Portfolio Management Services (PMS) and Alternative Investment Funds (AIFs), which cater to high-net-worth individuals. SEBI has proposed that these businesses be run through separate legal entities to avoid conflicts of interest and prevent cross-subsidization of costs between the mutual fund business and other ventures.
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Impact on Investors: This is a crucial governance reform. It ensures that the costs and resources of the mutual fund business, which serves millions of small retail investors, are not used to support other, more exclusive business lines. It promotes a cleaner, more focused operational structure dedicated solely to the interests of mutual fund unitholders.
What Do Fund Houses Think? The Industry Perspective
While these reforms are overwhelmingly positive for investors, they present a significant challenge for the mutual fund industry. AMCs will face margin pressure due to lower fee caps. They will need to rethink their business models, focus on operational efficiency, and justify their fees through genuine performance.
The transition may be bumpy, with potential fund mergers, scheme re-categorizations, and realignments of fee structures. Low-cost passive funds like ETFs and index funds are likely to gain even more prominence as the cost advantage of active funds diminishes. However, in the long run, these reforms will likely lead to a healthier, more competitive, and more resilient industry built on the foundation of investor trust.
The Road Ahead: A New Era for Mutual Fund Investing
SEBI’s proposed reforms signal a clear and unwavering commitment to prioritizing investor protection. The message is simple and powerful: make costs transparent, charge fairly, and deliver on your promises. As an investor, it’s essential to stay informed about these developments. Keep an eye on disclosures from your fund house and be prepared to review your portfolio as these changes are implemented.
The regulator is inviting public comments on these proposals until November 17, 2025, with final guidelines expected to follow soon after. The upcoming report on conflict-of-interest disclosure norms, due by November 10, 2025, will further strengthen this governance framework.
This is a structural reset for the Indian mutual fund industry. It is a move towards a leaner, cleaner, and more investor-centric ecosystem. For the millions of Indians who are entrusting their financial future to mutual funds, this is undoubtedly a step in the right direction, promising a future of lower costs, greater transparency, and ultimately, better returns.