Revolutionary Change in Mutual Funds! SEBI’s Proposal to Reduce Costs, AMCs to Face Pressure

Mutual Fund Fees: India’s Mutual Fund sector, currently managing ₹75.6 lakh crore across 24.3 crore investor folios, is bracing for one of the most consequential regulatory transformations since the sector’s liberalisation in the 1990s. On October 28, 2025, the Securities and Exchange Board of India (SEBI) released a comprehensive consultation paper proposing sweeping changes to mutual fund fee structures. This marks a fundamental rebalancing of the industry’s economic model that will reshape profitability calculations and competitive dynamics across asset management companies (AMCs).

The Core Transformation

SEBI’s proposals represent far more than cosmetic fee adjustments. The regulator is systematically dismantling the fee structures that have underpinned AMC profitability for the past decade. The most dramatic change involves brokerage compression.

• Cash market brokerage fees: These will plummet from 12 basis points to just 2 basis points.
• Derivatives brokerage: This will decline from 5 basis points to 1 basis point.

Simultaneously, the transitory 5 basis points additional expense charge, long presented as temporary, is being permanently eliminated. The rationale is compelling from an investor protection standpoint. Historically, AMCs bundled research services with brokerage execution, effectively charging investors twice for analytical services. By uncoupling these services and capping brokerage strictly to transaction costs, SEBI aims to ensure investors pay only once for any given service.

The Cascading Financial Impact

The financial implications are severe. Consensus estimates suggest that brokerage compression alone will eliminate approximately ₹6,000-₹8,000 crore in annual industry revenues. When combined with the removal of the 5 basis points transitory charge and the exclusion of statutory levies (STT, GST, CTT, stamp duty) from TER limits, the total annual fee pool available to the mutual fund industry could contract by ₹15,000-₹18,000 crore over three years.

For perspective, the mutual fund industry currently generates approximately ₹75,000+ crore annually in total fees. SEBI’s changes represent a 20-24 per cent compression of this revenue base—an existential threat to traditional business models that were predicated on continuous scale growth enabling margin expansion.

The Asymmetric Impact Across AMCs

The reforms will disproportionately impact mid-sized and smaller asset management companies. Organisations like Franklin Templeton, Invesco India, and Tata Mutual Fund, which built businesses around active management differentiation, face structural margin pressures. Conversely, mega-cap AMCs like ICICI Prudential, Axis, and Nippon Life India, with extreme cost discipline and passive fund infrastructure, can better absorb the compression through operational efficiency.

Smaller distributors face equally challenging dynamics. Financial advisors and mutual fund distributors earning 1-1.5 per cent commission on assets under management will become economically unviable as commissions compress to effectively 0.3-0.5 per cent across most schemes.

Disclaimer: The information provided in this article is for informational purposes only and should not be considered investment advice. Please consult with a qualified professional before making any financial decisions.