SEBI’s Game-Changing Proposal: Sharp Cut in Brokerage Charges for Mutual Funds and the Move Toward Performance-Linked Fees
The Securities and Exchange Board of India (SEBI) is once again rewriting the rules of the investment landscape. In a landmark proposal aimed at enhancing transparency, accountability, and cost efficiency in the mutual fund industry, SEBI has suggested a sharp reduction in brokerage caps and a performance-linked expense ratio for fund houses.
This move has far-reaching implications for investors, fund managers, and the broader financial ecosystem — potentially making India’s mutual fund market more competitive, transparent, and performance-driven.
1. Understanding the SEBI Proposal: What’s Changing?
1.1 The Core Proposal
SEBI has flagged concerns about “double charging” of investors — where fund houses were indirectly paying for research costs through brokerage commissions.
To curb this practice, SEBI proposes:
| Trade Type | Current Cap | Proposed Cap |
|---|---|---|
| Cash Trades | 12 basis points (bps) | 2 bps |
| Derivative Trades | 5 bps | 1 bps |
This drastic reduction in brokerage limits aims to unbundle research expenses from trading costs and ensure greater cost transparency for investors.
1.2 Why SEBI Is Doing This
The regulator observed that equity schemes were paying unusually high brokerage fees to stockbrokers, often including charges for research and analysis services, which are already covered under the fund’s expense ratio.
This practice effectively led to investors paying twice for the same research — a scenario SEBI now aims to end.
1.3 What Remains Unchanged
While brokerage costs are being slashed, statutory levies such as:
- Securities Transaction Tax (STT)
- Goods and Services Tax (GST)
- Stamp Duty
will remain outside the expense limits and continue as standard regulatory charges.
2. Breaking Down the Brokerage Reduction
2.1 What Are Basis Points (bps)?
A basis point is equal to 0.01%.
So, reducing brokerage from 12 bps to 2 bps means slashing it from 0.12% to 0.02% — a massive 83% reduction.
2.2 Example: How Much Money Investors Save
Let’s consider a mutual fund executing ₹10 crore worth of equity trades.
- Current brokerage (12 bps) = ₹1,20,000
- Proposed brokerage (2 bps) = ₹20,000
- Investor savings per trade = ₹1,00,000
Over multiple transactions per month, these savings could meaningfully improve investor returns, especially for large mutual fund schemes.
3. Performance-Linked Expense Ratios: A Paradigm Shift
Alongside the brokerage cuts, SEBI has also introduced a performance-linked expense ratio (PER) proposal.
This means that an AMC’s management fee could vary based on the fund’s performance.
3.1 How It Works
- If a scheme outperforms its benchmark, the AMC can charge a slightly higher expense ratio.
- If it underperforms, the expense ratio must be reduced.
This model aligns fund manager incentives with investor outcomes, ensuring performance accountability.
3.2 Voluntary Framework
The adoption of this model is voluntary.
SEBI will release a detailed performance-linked fee framework after stakeholder consultations to ensure fairness and feasibility.
4. Why SEBI’s Move Matters
4.1 Transparency for Investors
By cutting brokerage and separating research costs, SEBI ensures that investors can clearly see what they’re paying for.
Hidden costs have long been a pain point in mutual fund investing — this change brings clarity and accountability.
4.2 Lower Costs = Better Returns
Every rupee saved in transaction costs directly enhances investor returns.
As brokerage costs shrink, investors will benefit from:
- Higher net asset value (NAV) growth
- Lower expense ratios
- Improved cost-efficiency
4.3 Level Playing Field
This reform will standardize cost structures across AMCs, preventing some players from gaining unfair advantages through bundled research deals.
5. Key Challenges and Industry Response
5.1 Industry Concerns
While SEBI’s intent is widely appreciated, some AMCs and brokerages have expressed concern that:
- The proposed caps are too restrictive and could affect trade execution quality
- Smaller brokers might find it financially unviable to serve institutional clients
- Research quality may decline if funds stop paying for external analysis
5.2 SEBI’s Counterview
SEBI has clarified that research costs can still be incurred, but they must be transparently included in the fund’s expense ratio, not hidden within brokerage.
This encourages in-house research development and reduces dependency on third-party brokers.
5.3 Investor Community Reaction
Investor associations have largely welcomed the move, calling it a bold step toward transparency and fair cost distribution in the ₹50 lakh crore mutual fund industry.
6. The Larger Context: SEBI’s Reform Agenda
This brokerage proposal is part of SEBI’s broader strategy to make mutual funds:
- Simpler
- Cheaper
- More investor-friendly
Recent initiatives include:
- T+1 redemption settlement for faster withdrawals
- Enhanced disclosure norms for fund portfolios
- Tighter rules on expense ratio caps and commission payments
These collectively push India closer to a globally competitive mutual fund ecosystem.
7. What Investors Should Know
7.1 Will My Returns Improve?
Yes — indirectly.
Lower brokerage costs mean less leakage in fund expenses, which compounds positively for investors over time.
7.2 Should I Change My Fund?
No.
This reform benefits all equity schemes, regardless of AMC.
However, you can compare expense ratios across funds to identify the most cost-efficient performers.
7.3 Does It Affect Fund Managers?
Fund managers will now be more accountable for their performance since their compensation may be linked to fund returns under the proposed PER framework.
7.4 When Will This Take Effect?
The proposal is still under consultation.
Once SEBI finalizes and notifies the rule, AMCs will be given a transition period to comply.
8. Broader Implications: A Global Benchmark
India’s SEBI is not the first regulator to push for cost transparency.
Globally, watchdogs like:
- U.S. SEC (Securities and Exchange Commission)
- UK’s FCA (Financial Conduct Authority)
have implemented similar cost disclosure and performance-based fee structures.
SEBI’s proposal puts India in line with international best practices, signaling maturity and investor-centric governance.
9. Opportunities for the Mutual Fund Ecosystem
9.1 For AMCs
- Greater investor trust through transparent pricing
- Incentives to build in-house research capabilities
- Potential to attract foreign investors seeking governance-friendly funds
9.2 For Investors
- Lower trading costs
- Clearer expense breakdowns
- Long-term benefit through compounding of saved costs
9.3 For the Broader Market
- Reduced conflict of interest between brokers and fund houses
- Higher market integrity and efficiency
- Encouragement of technology-driven trading platforms
10. Potential Risks and Limitations
While the proposal is progressive, SEBI must address:
- Transition challenges for smaller AMCs and brokers
- Potential dip in liquidity if trading activity slows
- Research quality gaps if fund houses fail to develop internal expertise
Proper implementation and monitoring will be key to ensuring success.
11. What’s Next?
SEBI will invite public comments and industry feedback before finalizing:
- The exact brokerage limits
- The formula for performance-linked expense ratios
- Implementation timelines
A detailed guideline paper is expected by early 2026, following stakeholder consultation rounds.
12. Bottom Line: A Step Toward Investor-Centric Mutual Funds
SEBI’s proposal marks a transformational step in making India’s mutual fund industry more transparent, efficient, and performance-driven.
By cutting brokerage costs and linking fund manager pay to results, SEBI is setting the stage for a new era of responsible fund management — one where investors truly get what they pay for.
If successfully implemented, this could serve as a blueprint for emerging markets worldwide.
Disclaimer
The information presented in this article is for educational and informational purposes only. It does not constitute financial advice or investment recommendations. Readers are encouraged to consult with certified financial advisors or conduct independent research before making any investment decisions. SEBI’s proposal discussed here is currently in the consultation phase and may undergo changes before final implementation.
