How SEBI’s New Expense Ratio Rules Will Save You Money In Mutual Funds
On October 28, 2025, India’s financial watchdog Securities and Exchange Board of India (SEBI) released a consultation paper introducing SEBI’s New Expense Ratio Rules, potentially reshaping how you pay for mutual fund investments. This isn’t just another regulatory tweak—it’s the first comprehensive update of mutual fund rules since the 1990s, impacting an industry that now manages Rs 75.6 lakh crore of Indian savings. What makes this moment crucial is that these changes directly target hidden costs eating into your returns, often without you realizing it.
The Problem: Hidden Fees Eating Your Returns
Most mutual fund investors focus on one thing: fund performance. Yet studies show that fee structures matter far more than most people understand. Consider this: two funds delivering identical 10% annual returns can produce dramatically different final outcomes purely because of expense differences. A fund charging 2% in costs versus one charging 0.5% will have you with Rs 15 lakh less after 20 years on a Rs 10 lakh initial investment.
This wealth erosion happens invisibly, embedded in your daily Net Asset Value (NAV) calculations. You never see a bill. You never write a check. Yet by the time you retire, these fees could have cost you hundreds of thousands of rupees.
SEBI’s consultation paper identifies three specific places where this cost leakage happens and proposes surgical fixes.
The Changes in SEBI’s New Expense Ratio Rules
Change 1: Remove the Extra 0.05% Charge
Back in 2012, when SEBI changed how exit loads work, fund houses complained about losing revenue. To compensate, the regulator allowed them to charge an extra 0.05% on all schemes with exit loads. This was supposed to be temporary, lasting maybe three to five years.
Over a decade later, that “temporary” charge is still there. For most investors in equity funds, that 5 basis point (0.05%) charge adds up. On a Rs 10 lakh investment held for 20 years, this invisible fee alone costs you around Rs 10,000 in lost compounding.
SEBI now proposes removing this charge entirely because it no longer serves its original purpose. Fund houses claim they’ll be hurt, so SEBI has suggested a modest compromise: raising the base expense ratio for smaller funds by 5 basis points to offset some of the pain.
Change 2: Cut Brokerage Fees by 83%
When mutual fund managers buy and sell stocks, they pay brokerage fees to brokers. Currently, they can pass along up to 12 basis points (0.12%) of costs to you for regular stock trades.
Here’s where it gets sketchy: fund houses charge you a management fee (the TER) that theoretically includes research costs. Then they turn around and charge you again through brokerage fees for that same research. You’re essentially paying twice for the same service.
SEBI’s proposal is blunt: cut cash market brokerage limits from 12 basis points to just 2 basis points. For derivatives, it’s dropping from 5 basis points to 1 basis point. Any extra brokerage costs now come from inside the fund’s expense ratio, not as a separate charge to you.
This 83% reduction in equity brokerage caps represents SEBI’s most aggressive move. It’s designed to eliminate what industry insiders call “bundled research charges”—costs that essentially duplicate what you already pay in management fees.
Change 3: Show Taxes Separately
For the first time, SEBI permits fund houses to charge performance-based fees where managers earn more when they beat benchmarks and less when they underperform. The detailed rules are still being finalized.
Change 4: Allow Performance-Based Fees (Optional)
Currently, statutory charges like GST, Securities Transaction Tax (STT), and stamp duty get lumped into the expense ratio calculation. This creates confusion. If the government suddenly increases these taxes, your fund’s reported cost structure shifts even though the fund manager’s actual work hasn’t changed.
SEBI proposes pulling these taxes completely out of the TER framework. You’ll still pay them—they’re government obligations—but they’ll appear as separate line items. This transparency serves a practical purpose: it lets you compare funds based on actual management efficiency, not tax noise.
What This Means in Real Rupees: 4 Examples
Let’s move past abstract percentages and look at what these changes actually mean in rupees for different types of investors.
Scenario 1: The Rising Tech Professional
Meet Arjun, a 26-year-old software engineer in Bangalore earning Rs 12 lakh annually. He’s committed to investing Rs 15,000 every month for the next 22 years through a Systematic Investment Plan (SIP) in an equity-oriented mutual fund. This is a classic long-term wealth-building strategy.
Under Today’s System:
His fund charges 2.0% in base expenses plus 0.12% in brokerage costs
Expected gross return: 12% annually
Net return to Arjun: 9.88% (after all fees)
Over 22 years, his Rs 39.6 lakh investment grows to Rs 1.41 crore
Total fees paid throughout the period: Rs 18.47 lakh
After SEBI Proposed Changes:
Expense ratio drops to 1.85%, brokerage to 0.02%
Same gross return: 12% annually
Net return to Arjun: 10.13% (after all fees)
Over 22 years, his Rs 39.6 lakh investment grows to Rs 1.47 crore
Total fees paid: Rs 16.29 lakh
The Effect:
Arjun ends up with an extra Rs 5.28 lakh simply because the regulator cut unnecessary costs. That’s money that compounds in his account instead of flowing to fund houses and brokers. He doesn’t do anything different—the same fund, same strategy, same commitment—but he’s Rs 5.28 lakh richer. That’s a 3.73% improvement in his final corpus.
The practical implication: instead of buying that expensive car at age 48, Arjun could buy a property or send his child to premium education abroad.
Scenario 2: The Business Owner With Sudden Wealth
Priyanka, a 42-year-old real estate developer, has just sold a property and received Rs 50 lakh. She decides this is windfall money she doesn’t need immediately, so she’ll invest it in a large-cap equity fund for 8 years while she plans her next business moves.
Under Today’s System:
Fund charges 1.75% TER plus 0.12% brokerage
Expected return: 10.5% annually
Net return: 8.63%
After 8 years: Rs 50 lakh becomes Rs 96.95 lakh
Fees paid: Rs 7.48 lakh
After SEBI Proposed Changes:
Expense ratio drops to 1.60%, brokerage to 0.02%
Expected return: 10.5% annually
Net return: 8.88%
After 8 years: Rs 50 lakh becomes Rs 98.75 lakh
Fees paid: Rs 6.48 lakh
The Effect:
Priyanka pockets an extra Rs 1.8 lakh just from fee reductions. For business owners watching cash flows carefully, that’s the difference between self-funding an expansion or taking debt.9
Scenario 3: The Conservative Retiree
Rajesh, 65, has just retired with Rs 25 lakh from his employee fund buyout. He needs stability and income, so he chooses a debt-oriented mutual fund. He’ll stay invested for 5 years while deciding on his next phase.
Under Today’s System:
Debt fund charges 1.35% annually
Expected return: 7.5% annually
Net return: 6.15%
After 5 years: Rs 25 lakh becomes Rs 33.69 lakh
After SEBI Proposed Changes:
Expense ratio drops to 1.20%, plus potential 0.05% senior citizen benefit
Expected return: 7.5% annually
Net return: 6.35%
After 5 years: Rs 25 lakh becomes Rs 34.01 lakh
The Effect:
Rajesh gains Rs 31,861 over five years. For a retiree watching every rupee, that’s almost Rs 6,400 per year—equivalent to a modest monthly pension supplement without him doing anything.
Scenario 4: The First-Time Investor Choosing Index Funds
Amit, 28, is investing for the first time. He’s nervous about picking individual funds, so he chooses a simple Nifty 50 index fund with Rs 5,000 monthly SIPs for 15 years—a classic low-cost, low-maintenance approach.
Under Today’s System:
Index funds charge up to 0.50% annually
Expected return: 11% annually
Net return: 10.50%
After 15 years: Rs 9 lakh invested becomes Rs 21.89 lakh
After SEBI Proposed Changes:
Index fund expense ratio drops to 0.35%
Expected return: 11% annually
Net return: 10.65%
After 15 years: Rs 9 lakh invested becomes Rs 22.20 lakh
The Effect:
Amit gains Rs 30,938 over 15 years. While this seems smaller in percentage terms, here’s the insight: index funds are already low-cost options. Yet SEBI’s changes make them even cheaper, which is significant because it reinforces the value of passive investing for ordinary people who don’t have time to research individual funds.
Who Gets Hurt by These Changes?
These cost cuts look great for you, but they’re painful for fund houses and the broker ecosystem.
Most Asset Management Companies (AMC) operate on profit margins of 30-35 basis points—meaning they keep only 30-35 basis points from every percentage point of fees they charge. When you reduce fees by 15-20 basis points, you’re essentially cutting their profit by nearly 50%.
The Jefferies analysis estimates that India’s major mutual fund companies could see profit-before-tax reductions of 30-33%. That’s substantial. Some smaller fund houses might struggle to maintain their distributor networks, which could temporarily reduce competition and service quality before market forces stabilize things.
Brokers are even harder hit. The 83% reduction in brokerage caps means they’re losing significant revenue. Historically, brokers earned between 5-12 basis points per trade. Now they’re capped at 1-2 basis points. That’s not just a reduction; it’s a structural change to their business model.
However, there’s a flip side: this pressure might force fund houses to become more efficient, cut unnecessary expenses, and compete harder on actual fund performance rather than marketing spend. Over time, this could make the industry more merit-based.
Other Changes You Should Know
Beyond fee structures, the consultation paper proposes several other practical changes.
Digital-First Communications: Fund houses no longer need to publish important notices in newspapers. Instead, email, SMS, and website updates are sufficient. This cuts costs and speeds up communication with investors.
NFO Cost Responsibility: Any marketing or launch expenses for new funds must be borne by the fund house, sponsors, or trustees—never by investors. This prevents retail investors from subsidizing new fund launches they don’t participate in.
Detailed Expense Breakdowns: Fund houses must now break down every cost component—management fees, brokerage, exchange fees, regulatory charges, and statutory taxes. No more lumping everything under “miscellaneous expenses.” You’ll know exactly where your money goes.
Performance-Linked Fees (Optional): For the first time, SEBI permits fund houses to charge performance-based fees where managers earn more when they beat benchmarks and less when they underperform. The detailed rules are still being finalized.
What This Means for Your Investments
These changes don’t require you to do anything dramatic, but they do offer strategic opportunities.
Reassess Your Current Holdings: If you’re already in mutual funds, your costs are about to drop, which means your future returns improve automatically. No action needed, but worth noting.
Index Funds Just Became More Attractive: With expense ratios dropping from 1.00% to 0.85%, passive index investing becomes an even more compelling case for investors who don’t have time to research active funds. Over 20-30 year horizons, this small fee difference compounds into life-changing wealth.
Expensive Active Funds Face Pressure: Fund houses charging premium fees for active management will struggle to justify those costs if passive alternatives are now dirt-cheap. Performance-linked fee structures might emerge as a way for top performers to stay expensive.
SIPs Get Better Returns: If you’re building wealth through monthly SIPs—the preferred route for salaried employees—your returns automatically improve. That Rs 10,000 monthly investment now compounds at a slightly higher rate, and over decades, this matters enormously.
Timeline and Implementation
SEBI has invited public feedback on these proposals until November 17, 2025. After that, there will likely be a consultation period with industry stakeholders (fund houses, brokers, distributors) before final rules are published.
Implementation typically happens 2-3 months after final notification, which suggests these changes could start taking effect by early 2026. Fund houses will need time to reprogram systems, update offer documents, and restructure agreements with brokers and distributors.
The Bottom Line
SEBI is making mutual fund investing cheaper and clearer. Your fees will drop. Your net returns will improve. You don’t need to do anything—it happens automatically.
If you’ve been hesitant about investing because fees seemed high, this is good news. If you’re already invested, even better—your future returns just got better without you doing anything.
The practical takeaway: in wealth creation, you keep the returns after costs. SEBI is now making sure you keep more. When these rules take effect, everyone’s portfolios will quietly become a little more valuable, thanks to a regulator’s decision to cut unnecessary costs.
