Investing In Mutual Funds? SEBI Just Changed What And How Much You Will Pay

If you invest in mutual funds, get ready for clearer fee disclosures and tighter cost controls. Sebi has overhauled how fund houses can charge and report expenses, bringing much-needed transparency to what investors actually pay. For the first time, you will see exactly how much goes to fund managers, how much to brokers, and what portion is tax.

What Sebi has changed in mutual fund costs

Until now, the Total Expense Ratio (TER) was a bundled figure. It included everything: fund management fees, brokerage, Sebi fees, GST, and more. As an investor, you had no way of knowing which part went to the fund house versus what was paid as tax or trading costs.

Sebi has now split TER into four components:

• Base Expense Ratio (BER), which reflects the fund house's own fee for managing your money
• Brokerage and transaction costs
• Regulatory levies like Sebi and exchange fees
• Statutory levies such as GST, stamp duty and other taxes

This means you will now know exactly how much of your cost is the AMC's margin and how much is unavoidable regulatory cost. More importantly, Sebi has reduced the cap on BER across several fund categories.

Lower cost caps across fund types

• Index funds and ETFs have a BER cap of 0.9 percent, reduced from the earlier 1 percent.
• Equity-oriented fund-of-funds are capped at 2.10 percent, down from 2.25 percent.
• Other fund-of-funds drop to 1.85 percent from 2 percent.
• Equity close-ended funds are capped at 1 percent from 1.25 percent.
• Non-equity close-ended funds are capped at 0.8 percent from 1 percent.

Brokerage caps have also been tightened. Cash market trades now face a cap of 6 basis points compared to 8.59 earlier. Derivatives are capped at 2 basis points from about 4. An additional buffer for exit load schemes has also been removed.

What this means for your investment

Suppose you invest Rs 1,00,000 in an index fund. Earlier, you would see a TER of 1 percent, with no visibility into the breakdown. Now, you will see:

• BER at 0.70 percent
• Brokerage at 0.10 percent
• Regulatory charges at 0.05 percent
• Statutory levies at 0.15 percent
• Total cost: 1 percent

As new BER caps take effect and AMCs compete, you might later see:

• BER at 0.45 percent
• Brokerage at 0.08 percent
• Regulatory charges at 0.05 percent
• Statutory levies at 0.15 percent
• Total cost: 0.73 percent

That saves you Rs 270 per year on a Rs 1 lakh investment. Over time and across a portfolio, these savings can add up significantly.

Why this matters

As an investor, you can now compare funds based on BER, not just the headline TER. For example, two Nifty 50 index funds may both charge 0.80 percent, but one may retain only 0.30 percent for itself while the other keeps 0.55 percent. This difference now becomes visible.

You can also spot funds with high brokerage costs, which may indicate excessive trading or poor execution. And you can assess whether actively managed funds are justifying their higher BER through superior performance.

What to watch for in different fund types

• In index funds and ETFs, focus on BER and tracking difference instead of just TER.
• In actively managed funds, compare BER to returns and risk.
• In fund-of-funds, pay extra attention since these products stack costs.
• In close-ended schemes, expect leaner pricing with no premium for locking up your money.

This Sebi reform does not promise an immediate drop in your mutual fund costs. But by unbundling fees, setting stricter caps, and improving disclosures, it empowers you to choose better and demand more.