Securities and Exchange Board of India (SEBI) has notified a comprehensively revised Mutual Fund regulatory framework, introducing performance-linked expense structures, stricter governance norms, and enhanced disclosures.
These reforms, approved at SEBI’s December Board Meeting, will come into effect from 1 April 2026, marking the most significant overhaul of mutual fund regulations in over three decades.
Background and Rationale
- The existing mutual fund regulatory framework had evolved incrementally over 30+ years.
- Rising concerns over opaque fee structures, bundled costs, and weak accountability of trustees and AMCs prompted SEBI to undertake structural reforms.
- The objective is to:
- Strengthen investor protection
- Improve cost transparency
- Align fund manager incentives with investor outcomes
- Modernise compliance using digital-first processes
Key Changes under SEBI’s New Mutual Fund Regulations (Effective April 2026)
1. Performance-Linked Base Expense Ratio (BER) Introduced
- SEBI has introduced the concept of a Base Expense Ratio (BER).
- What BER includes:
- Only the management fee charged by the Asset Management Company (AMC) for managing investors’ money.
- What is excluded from BER:
- Brokerage
- Securities Transaction Tax (STT)
- Stamp duty
- Exchange fees
- These excluded costs must now be disclosed separately as pass-through expenses.
Performance-based pricing:
- Mutual fund schemes may link the BER to scheme performance, subject to:
- Conditions specified by SEBI
- Mandatory performance-related disclosures
- Purpose:
- Align AMC compensation with fund performance
- Enable investors to clearly see what they pay for fund management versus market-related costs
2. Structural Shift in Expense Disclosure
- Earlier system:
- All costs were bundled into the Total Expense Ratio (TER), making comparisons difficult.
- New system:
- BER shows pure management cost.
- All transaction-related expenses appear as separate line items.
- Impact:
- Investors can now assess the true cost of investing more accurately.
3. Rationalisation of Brokerage Caps
SEBI has tightened brokerage ceilings to curb hidden charges:
- Cash market:
- Cap reduced to 6 basis points (bps)
- Earlier effective level: 8.59 bps
- Derivatives segment:
- Cap reduced to 2 bps
- Earlier: 3.89 bps
Significance:
- Limits excessive intermediation costs
- Enhances cost efficiency and fairness for investors
4. Expanded Role and Accountability of Trustees
- Trustees’ responsibilities have been significantly strengthened.
- Key obligations:
- Conduct close scrutiny of investment management activities
- Examine analytical reports on fund performance
- Detect irregularities or errors in mutual fund operations
- Escalate issues to AMCs and track corrective action
- Trustees are no longer passive overseers but act as active guardians of investor interest.
5. Stronger Governance for AMCs and Senior Management
- Clearer accountability for:
- Trustees
- Key managerial personnel
- Asset Management Companies
- Governance reforms aim to:
- Reduce operational and conduct risk
- Increase investor confidence
- Improve long-term credibility of the mutual fund industry
6. Digital-First and Simplified Compliance Framework
SEBI has eased operational burdens while tightening core protections:
- Investor communications (annual reports, disclosures) to move fully digital
- Reduced frequency of mandatory trustee meetings
- Newspaper advertisements for scheme changes scrapped
- Online disclosures to be the primary mode of information sharing
- Removal of overlapping and duplicative reporting requirements
Purpose:
- Lower compliance costs
- Improve speed, accessibility, and transparency of disclosures
Impact of the New Rules
On Investors
- Greater fee transparency
- Clear visibility into management costs vs transaction costs
- Potential benefit from performance-linked incentives
- Reduced risk of hidden charges
On Mutual Funds and AMCs
- Large funds may face pressure under clearer fee disclosure
- Strong incentive to improve performance and governance
- Higher compliance standards and reputational accountability
Why SEBI Introduced These Reforms
- Prevent opaque and complex fee structures
- Align fund manager incentives with investor returns
- Strengthen trustee oversight and AMC accountability
- Modernise India’s mutual fund industry in line with global best practices