SEBI's New MF Rules 2026: Lower Costs, More Transparency

Introduction to the New Regulatory Framework

The Securities and Exchange Board of India (SEBI) has notified the SEBI (Mutual Funds) Regulations, 2026, initiating a significant overhaul of the industry's regulatory landscape. These new rules, set to come into force on April 1, 2026, will replace the existing framework that has been in place since 1996. This marks the first comprehensive revision in nearly three decades, aimed at enhancing investor protection, ensuring greater transparency in costs, and establishing stronger governance and accountability for Asset Management Companies (AMCs) and trustees.

Unbundling Expenses: The Shift from TER to BER

A central component of the new regulations is the restructuring of how mutual funds charge investors. The long-standing Total Expense Ratio (TER) will be replaced by a more transparent model featuring a Base Expense Ratio (BER). The TER was a single, all-inclusive figure that often made it difficult for investors to understand the breakdown of costs. Under the new system, the BER will primarily cover fund management and administrative fees. Other expenses, such as brokerage costs, transaction charges, and statutory levies, will be unbundled and disclosed separately. This change is designed to give investors a clear and precise view of what they are paying for, distinguishing between the AMC's service fees and other operational costs.

Significant Reduction in Brokerage Costs

To directly lower the financial burden on investors, SEBI has mandated sharp reductions in the brokerage fees that AMCs can charge to a scheme. For transactions in the cash equity market, the permissible brokerage cost has been halved from 12 basis points (0.12%) to 6 basis points (0.06%). Similarly, for derivative transactions, the cap has been more than halved, reduced from 5 basis points (0.05%) to just 2 basis points (0.02%). These cuts are expected to reduce the overall expense ratio, potentially leading to better long-term returns for investors as less of their capital is eroded by transaction costs.

Abolition of Additional Exit Load Charges

Another pro-investor move is the elimination of the additional 5 basis points (0.05%) that AMCs could charge over and above the exit load when an investor redeemed their units. This fee was often used to cover certain expenses but was seen as an extra cost for investors exiting a fund. By scrapping this charge, SEBI has simplified the exit process and removed a layer of expense, making redemptions more straightforward and less costly for investors.

Stricter Norms for Equity Fund Classification

The regulatory overhaul extends beyond expenses to the very definition and operation of equity schemes. The new rules mandate a higher minimum equity allocation for several categories, including thematic, focus, contra, and value funds, ensuring they adhere more strictly to their stated investment objectives. Furthermore, SEBI has introduced stricter rules to prevent portfolio overlap among different schemes managed by the same fund house. This overlap will now be computed on a quarterly basis, forcing AMCs to maintain distinct portfolios for each fund and preventing investors from unknowingly investing in multiple schemes with similar holdings.

Key Regulatory Changes at a Glance

To provide a clear summary of the most impactful changes, the following table compares the old and new regulatory provisions:

Market and Expert Perspectives

Industry experts have largely welcomed the new regulations as a positive development for retail investors. Nikunj Saraf, CEO at Choice Wealth, noted that the rules simplify an increasingly complex industry, reduce scheme overlap, and improve comparability. He emphasized that the changes bring much-needed transparency to product positioning. Varun Fatehpuria, Founder of Daulat Finvest, pointed out that while the immediate net impact on investor costs might be limited because statutory charges are now excluded from the main expense ratio, the framework establishes better accountability. Any future changes in fund management fees or regulatory charges will be clearly visible to investors.

What the New Rules Mean for Investors

For the average mutual fund investor, these changes signify a shift towards a more transparent and potentially more cost-effective investment environment. The primary advantage is the clarity provided by the unbundled expense structure. Investors will be able to compare funds based on their core management fees (BER) more effectively. While the regulations do not necessitate any immediate changes to existing investment portfolios, they empower investors with better information to make more informed decisions. Over time, the reduced caps on brokerage and the elimination of extra fees are expected to contribute positively to investment returns.

Conclusion

The SEBI (Mutual Funds) Regulations, 2026, represent a landmark reform for the Indian mutual fund industry. By focusing on cost reduction, transparency, and stricter governance, SEBI is aligning the regulatory framework with the best interests of investors. As the April 1, 2026 implementation date approaches, AMCs will begin recalibrating their fee structures and updating their scheme documents. Investors should watch for these revised disclosures to understand how their specific funds are affected and to leverage the newfound transparency in managing their investments.