The Securities and Exchange Board of India (SEBI) has launched a sweeping consultation paper to overhaul the mutual-fund cost structure to rationalise costs to investors and bring more transparency. This move is not just regulatory housekeeping; it has real implications for asset-management companies (AMCs), fund distributors (MFDs), and ultimately, investors.

With India’s mutual-fund industry now managing assets in the hundreds of trillions of rupees, SEBI argues that some economies of scale haven’t translated into lower costs for investors.
In this blog, we’ll unpack what’s proposed, why it matters, and how it could reshape the earnings and dynamics for mutual fund distributors.

What’s Changing: Top Regulatory Proposals

Here are key reforms SEBI is floating (with backing from external sources) that matter for distributors:

End of the ‘Extra 5 bps’ Fee

SEBI proposes removing the additional 5 basis points (bps) expense that had been allowed on AUMs since 2018, calling it “transitory in nature”. Therefore, with an objective to rationalise cost for the investor, this has been removed.
For investors: fewer hidden extra fees.
For AMCs/distributors: a potential squeeze if margin compensation isn’t fully restored.

Base TER Slabs Revision

To partly offset the impact of the above proposed changes on AMC operations, the first two TER slabs for open‐ended active schemes are proposed to be increased by 5 bps.
Smaller AUM schemes might benefit; large AUMs might face tougher economics.

Statutory Levies Moved Outside TER

All statutory charges (STT, CTT, GST, stamp duty) will now be excluded from TER limits and shown separately.
This change increases transparency, investors can clearly see what the fund cost is vs. tax expense.

Sharper Definitions & Disclosure of TER

TER will be required to include management fees, brokerage & transaction costs, exchange and regulatory fees, and statutory levies (disclosed separately).
This forces all AMCs to show the breakup of cost heads, a good move that will enhance transparency for investors. 

Big Cut in Brokerage Caps

SEBI has proposed a sharp reduction in brokerage charges that mutual funds pay for their market trades:

• Cash market brokerage: 12 bps ➜ 2 bps
• Derivatives: 5 bps ➜ 1 bps

This implies that investors will save costs, as AMCs will pay less brokerage charges from investor funds.
This reform aims to protect investor interest, eliminating instances where ‘execution + research’ bundling inflates costs for investors. Thus, the investor is charged fairly and only once for the expense. 

Performance-Linked TER (Optional)

A new optional framework allows AMCs to levy a variable TER depending on fund performance (higher if outperforming, lower if underperforming).
This is a novel change for India and introduces a performance-based incentive alignment between AMCs and investors. It means investors pay more only when a scheme delivers above-average returns. 

NFO Costs Stay with Sponsor/AMC

SEBI, in the consultation paper, has affirmed that all expenses incurred in launching a new fund offer (NFO) until allotment of units must be borne by the AMC, trustee, or sponsor, not charged to the scheme.

Why This Matters For MFDs

For mutual fund distributors, these reforms bring opportunity and challenge.

Potential Advantages

• Improved clarity: With clearer TER disclosures and cost break-ups, you can educate clients better.
  
• Greater transparency builds trust: When investors see cost components broken out, distributors who take time to explain gain credibility.
  
• Better positioning in smaller-AUM funds: The 5 bps upward revision in lower slabs allows for better economics for smaller funds, good for distributors who focus on niche funds.
  
• Statutory levy exclusion might open tax advantages: Some commentary suggests that GST on distributor commissions might stay outside TER, opening possibility for input tax credit.

Potential Disadvantages/Risks

• Reduced trail in large schemes: At higher AUM slabs, stricter TER and brokerage caps could reduce commission pools.
  
• Brokerage caps squeeze margins: With brokerage from 12 bps down to 2 bps (cash) and 5 bps to 1 bp (derivatives), the operating margin for AMCs and distributors could shrink.
  
• High-churn strategies are at risk: Schemes with high trading costs may face tighter constraints, which can indirectly reduce distributor incentives.
  
• Implementation uncertainty: Until final rules are out, there is ambiguity. Distributors must prepare but cannot yet fully know the final structure.
  
• Operational/disclosure burden: More granular disclosure means more compliance, which can translate into more time spent on administrative, rather than sales, tasks.

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Final Thoughts

SEBI’s consultation paper is an important push towards greater transparency, fairness, and investor alignment in mutual fund costs.
For distributors, the terrain will change: some rain, some shine. The key will be to stay informed and updated, adapt to the reforms, and leverage the transparency wave to build stronger client relationships.

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