SEBI’s Proposed Changes in TER and Brokerage Structure: What Investors Need to Know
The Securities and Exchange Board of India (SEBI) has proposed major reforms to the Total Expense Ratio (TER) and brokerage fee structure for mutual funds, aiming to enhance transparency, reduce investor costs, and simplify compliance across the industry.
Proposed Changes in TER Structure
Prior to 2012, mutual funds (MFs) were allowed to charge an exit load to the scheme, which was used by asset management companies (AMCs) for distributors’ commissions and marketing expenses.
Later, SEBI mandated exit loads to be credited back to the scheme, and AMCs were permitted to charge an additional 20 basis points (bps) as expense to the scheme — a limit that was reduced to 5 bps in 2018.
Now, SEBI plans to remove this additional 5-bps allowance, considering it transitory in nature.
However, to reduce the impact on AMCs, the TER cap has been increased by 5 bps for the first two slabs of open-ended equity schemes.
Under the new structure:
For AUM up to ₹500 crore:
Active funds can charge 2.5%,
Passive funds can charge 2.0%.
For AUM between ₹500 crore and ₹700 crore:
TER is capped at 2.0% for active funds, and 1.75% for passive funds.
TERs will decline gradually across three higher slabs as AUM increases.
This change will affect larger fund houses more than smaller ones, given the scale-based structure.
Changes in Brokerage Fees
SEBI has also proposed to tighten limits on brokerage and transaction charges.
Currently, AMCs can charge up to 0.12% (12 bps) of trade value in cash-market transactions and 0.05% (5 bps) on derivative transactions.
However, SEBI noted that brokerage paid on arbitrage funds is generally lower than other schemes, while higher charges on non-arbitrage funds often include research services, leading to double payment for investors — once under TER and again under management fees.
To protect investors’ interests, SEBI plans to:
Reduce brokerage charges to 2 bps (0.02%) for cash-market transactions, and
1 bp (0.01%) for derivative transactions.
All other execution and statutory costs may be charged on an actual basis.
Impact on AMCs and Brokers
A reduction in TER will compress AMC profit margins, pushing fund houses to cut operating expenses.
The move is expected to reduce TER by 15–20 bps across schemes, directly boosting investor returns.
While brokerages may feel a sharper impact due to reduced commission, rising AUM growth could offset revenue loss through higher trading volumes.
Brokerages can also separately monetize research services as independent offerings.
Investor Impact: Cost Savings Example
SEBI’s direct 15-bps TER reduction across existing slabs translates to tangible savings for investors.
For instance, an equity scheme with AUM above ₹50,000 crore currently charges 1.05% TER, which under the new proposal will drop to 0.90%.
In addition, the 5-bps exit-load allowance will be eliminated, resulting in a total cost reduction of 15–20 bps, plus an additional 10-bps cut from lower brokerage costs.
For example:
A ₹1,00,000 investment currently costing ₹1,000 (1% TER) could soon cost ₹800–₹850, depending on fund type and trading frequency.
“AMCs are still evaluating the overall impact,” said Vinayak Magotra, Product Head & Founding Team, Centricity WealthTech.
Why SEBI Introduced These Changes
The reforms aim to:
Simplify mutual fund regulations,
Enhance cost transparency,
Boost investor confidence, and
Ensure better regulatory clarity across fund structures.
By aligning expense and brokerage rules with evolving market practices, SEBI intends to make mutual fund investing more efficient and investor-friendly.
For more insights on mutual fund regulations, TER structures, and investor implications, explore expert commentary by Ranjit Jha (CEO) — a leader known for simplifying India’s evolving investment landscape.
To understand how to optimize your fund portfolio and reduce expense drag, connect with Rurash Financials — experts in investment advisory, mutual fund analytics, and portfolio optimization.