SEBI’s game-changing mutual-fund reform

The Securities and Exchange Board of India (SEBI) has fired the opening shot in what could become the most consequential cost reform in Indian finance since liberalization. Its October 2025 consultation paper on the comprehensive review of the Mutual Fund Regulations, 1996 does more than tweak numbers, it redefines purpose.

SEBI is shifting the axis of regulation from product protection to investor empowerment, while its counterpart, the Insurance Regulatory and Development Authority of India (IRDAI), still seems to guard complexity more than clarity.

Expense ratios have long been the silent killer of compounding. SEBI now proposes that the Total Expense Ratio (TER) on open-ended schemes exclude brokerage, taxes, and statutory levies, revealing what fund managers actually earn. It also seeks to slash brokerage caps from 12 basis points (bps) to 2 bps in cash markets and from 5 bps to 1 bp in derivatives.

These reforms attack a chronic inefficiency: investors paying twice for research, once within the management fee, again through trading commissions. Even a 0.2 per cent annual saving compounded over 20 years adds lakhs to investor wealth. The true victory, however, is not numerical it’s philosophical.

Aligning fees with performance

SEBI’s most radical idea is an optional performance-linked expense ratio, where fund houses earn more only when they outperform. If implemented, India would join global markets where “value-for-fee” replaces “fee-for-assets.” Fund managers would finally be rewarded for skill, not scale.

Together, clearer TER definitions and tighter brokerage caps dismantle the opacity that long protected intermediaries and mark a cultural shift – investors can now see what they pay and why.

Transparency redefined

The paper also proposes excluding statutory levies GST, stamp duty, and STT from TER ceilings so that government taxes no longer masquerade as fund costs. Equally bold is SEBI’s plan to rewrite the 1996 Regulations in plain language, remove redundant clauses, and digitise disclosures.

For perhaps the first time, India’s financial rulebook might read like a guide for citizens, not a manual for compliance officers.

The distribution paradox

Every reform disrupts a comfort zone. Lower TERs mean thinner commissions, and thinner commissions change distributor behaviour. As income from mutual-fund sales shrinks, intermediaries may pivot toward higher-margin, higher-risk products Portfolio Management Services (PMS), Alternative Investment Funds (AIFs), and structured notes where disclosure is looser and investor safeguards weaker.

This cost-arbitrage migration could push household savings from transparent mutual funds into opaque instruments.

SEBI’s next challenge, therefore, is to extend disclosure parity and suitability norms across investment categories so that progress in one arena doesn’t create risk in another.

The mirror test

IRDAI’s Unit-Linked Insurance Plans (ULIPs) still blur investment with protection. Unlike mutual funds that show a true post-cost NAV, ULIPs deduct mortality and administrative charges through periodic unit cancellations – making the NAV appear to rise even as ownership shrinks, a mathematical illusion that flatters returns. IRDAI’s 2019 ULIP rules mandate benefit illustrations and yield-gap caps (3 per cent for terms under 10 years, 2.25 per cent for longer), yet costs remain layered and distributor-driven.

Mortality charges exceed standalone term plans, surrender penalties limit liquidity, and portability is restricted. The contrast between regulators is stark: SEBI’s approach is fiduciary align incentives, disclose every rupee, empower comparison, while IRDAI’s remains distributor- centric, where commissions dominate and complexity conceals. Over time, the difference compounds; a Rs. 10,000 monthly SIP in a low-cost equity fund can nearly double the corpus of a ULIP.

The investor’s choice

For Indian households balancing protection and growth, the rule is clear: buy term insurance for life cover – it is transparent, portable, and cost-efficient – and invest through mutual funds for wealth creation – they are benchmarked, diversified, and increasingly low-cost. SEBI’s reforms reinforce this distinction, proving that simplicity often compounds better than complexity.

Unless IRDAI mirrors this transparency by mandating after- cost disclosure and capping commissions, insurance-linked products will remain financial cul-de-sacs.

Yet beyond numbers, SEBI’s reform is about trust – it transfers informational power from distributors to investors and from incentives to outcomes.

If implemented well, India could become a rare market where regulation internalises behavioural finance, simplifies choice, and rewards clarity. But for that to endure, distributors must evolve from selling products to offering advice.

The road ahead

SEBI’s reform will endure only if three conditions hold – uniform cost and disclosure standards across mutual funds, PMS, AIFs, and structured products to close regulatory gaps; strong suitability norms to ensure that high-risk products reach only informed investors; and coordination with IRDAI and PFRDA to harmonise reporting and post-cost return metrics.

For IRDAI, the task is to simplify ULIP cost sheets and truly unbundle insurance from investment. For distributors, survival will depend on earning trust, not trails. Ultimately, India’s mutual-fund revolution was built on trust, not tax breaks.

SEBI’s 2025 proposal deepens that trust by making every layer of cost visible and reminding the industry that scale without stewardship is hollow. The next decade will decide whether Indian finance remains a maze of incentives -or evolves into a system where investors, not intermediaries, truly win.