SEBI Overhauls Mutual Fund Expenses, Boosting Investor Transparency

The Securities and Exchange Board of India (SEBI) introduced significant reforms to mutual fund expense regulations on March 15, 2024. These changes aim to enhance transparency for investors while potentially exerting short-term pressure on asset management companies (AMCs). According to a research analysis by Centrum, the revisions are expected to yield long-term benefits for investors.

One of the key elements of SEBI’s new regulations is the removal of an additional allowance of 5 basis points (bps) associated with exit loads. This adjustment is intended to eliminate hidden costs, thereby improving clarity regarding fund expenses. Although this move may negatively impact AMC profitability in the immediate future, it is designed to better align the costs borne by investors with the actual expenses of fund management.

Centrum’s report indicates that, without any mitigating actions, AMCs could face a cumulative impact on profit before tax (PBT) by the end of fiscal year 2027 (FY27). Nevertheless, the report suggests that fund houses have the opportunity to adjust their operating structures. This could include passing part of the cost burden to distributors, which would help maintain business sustainability without raising costs for investors directly.

Enhanced Transparency and Adjustments to Expense Ratios

In a notable move for investors, SEBI has proposed adjustments to the total expense ratio (TER) slabs for larger equity-oriented schemes. The regulator has revised the proposed TER cut for schemes with assets exceeding Rs 20 billion from an initial 15 bps to 10 bps. This change aims to ensure that efficient large schemes remain viable while providing competitive pricing for investors.

A significant aspect of the reforms is SEBI’s commitment to transparency. The new regulations require clearer segregation of base expenses, brokerage costs, and statutory levies. This enhanced disclosure framework is expected to empower investors by enabling them to understand the true costs associated with mutual fund investments. By fostering greater trust and confidence in the mutual fund industry, these reforms are anticipated to have a positive impact over the medium to long term.

SEBI has also implemented reductions in brokerage caps across both cash and derivatives segments, with statutory levies now charged separately. The report suggests that the overall impact on brokerages will be broadly neutral, as the expected reduction in brokerage revenues is likely to be limited. This approach aims to ensure market stability while reinforcing cost discipline across the sector.

Long-term Benefits for Investors

Overall, these reforms are viewed as structurally beneficial for investors. The combination of lower and more transparent expense disclosures, stricter cost controls, and improved comparability among schemes is expected to facilitate more informed investment decisions. While AMCs may face short-term earnings pressure as a result of these changes, the long-term outlook suggests a healthier and more transparent mutual fund ecosystem.

This shift is poised to better align the economic interests of the industry with those of investors, ultimately contributing to greater market efficiency. The ongoing evolution in mutual fund regulations indicates a commitment to enhancing investor experience and promoting a sustainable financial environment.