Source: The post “New Mutual FUnds Regulations on Total Expense Ratio (TER) and Brokerage Costs” has been created, based on “New Mutual FUnds Regulations on Total Expense Ratio (TER) and Brokerage Costs” published in “The Hindu Businessline” on 6 November 2025. New Mutual FUnds Regulations on Total Expense Ratio (TER) and Brokerage Costs.
UPSC Syllabus: GS Paper -3- Economic Development
Context: The Securities and Exchange Board of India (SEBI) has proposed changes in the Total Expense Ratio (TER) and brokerage fee structure for mutual funds to increase transparency, protect investors, and align costs with fund performance. These reforms focus on reducing investor burden while streamlining fund house expenses.
About Total Expense Ratio (TER)
- Definition: TER is the total cost charged by a mutual fund to manage and operate an investment scheme, expressed as a percentage of the fund’s average assets under management (AUM).
- Components: It includes management fees, administrative costs, distribution expenses, registrar fees, and marketing costs.
- Significance: A higher TER reduces investor returns, while a lower TER indicates more cost-efficient fund management. SEBI regulates TER to ensure transparency and prevent excessive charges to investors.
About Brokerage Fee
- Definition: Brokerage fee is the transaction cost paid by mutual funds to brokers for buying and selling securities in the market.
- Types: It applies to both cash market transactions and derivatives trades.
- Purpose: Lower brokerage helps reduce overall fund expenses, contributing to a smaller TER and better investor returns.
Proposed Changes in TER Structure
- SEBI plans to remove the additional 5 basis points (bps) charge earlier allowed to AMCs.
- Revised TER slabs:
- Up to ₹500 crore AUM – 2.5% (active), 2% (passive)
- ₹500–₹700 crore AUM – 2% (active), 1.75% (passive)
- TER will decline as AUM increases, benefiting larger fund houses.
Changes in Brokerage Fees
- Brokerage for cash market transactions reduced from 12 bps to 2 bps, and for derivatives from 5 bps to 1 bps.
- All other expenses are to be charged on an actual basis.
- The move aims to reduce high bundled brokerage and research fees that burden investors.
Impact on AMCs, Brokers and Investors
- AMCs: Profit margins expected to fall by 15–20 bps, forcing efficiency and cost control.
- Brokers: May experience lower income initially, but higher AUM could lead to more trades, offsetting losses over time.
- Impact on Investors:
- Lower TER means reduced costs and better returns.
- Example: For a ₹1 lakh investment, a 1% TER cut can save ₹150–₹200
- Removal of exit load and transaction cost reduction directly benefit investors.
- Industry Perspective
- Large fund houses are optimistic about managing the cost through efficiency and distribution improvements.
- The rising AUM base will help absorb the impact in the medium term. Overall, it is seen as a positive, investor-centric reform.
Challenges
- Reduced AMC Profitability: Smaller AMCs may face financial strain due to lower TER caps, affecting operational sustainability.
- Brokerage Pressure: Sharp cuts in brokerage rates could hurt small and mid-sized brokers who depend on transaction volumes.
- Operational Adjustments: Fund houses need to redesign their fee structures, impacting short-term operations.
- Possible Quality Reduction in Research and Advisory: Unbundling brokerage and research services might lead to reduced access to quality market research.
- Implementation Complexity: Ensuring compliance and uniform adoption across the industry may pose regulatory challenges initially.
Way Forward
- Phased Implementation: Gradual rollout of TER and brokerage reforms can help smaller AMCs and brokers adapt.
- Encouraging Technological Efficiency: Leveraging fintech and automation can reduce costs and compensate for reduced margins.
- Transparency and Investor Education: Clear disclosures and investor awareness programs can build trust and understanding of cost structures.
- Balanced Regulation: SEBI can periodically review the caps to ensure that investor protection does not compromise market sustainability.
- Promoting Competition and Scale: Encouraging consolidation and operational collaboration among smaller AMCs to achieve economies of scale.
Conclusion: The new SEBI proposals mark a progressive shift toward a more transparent and investor-friendly mutual fund regime. While challenges exist for AMCs and brokers, the long-term benefits—lower investor costs, higher accountability, and stronger market discipline—make this reform a crucial step in deepening India’s mutual fund ecosystem.
Question: What do new SEBI regulations on TER and brokerage costs mean for mutual funds and investors?
