SEBI’s 2026 Mutual Fund Regulations Overhaul: Lower TERs, Performance Fees And Governance Expectations For AMCs

1. Introduction

The Mutual Funds Regulations 2026 of SEBI together with the new expense ratio framework will establish new methods for Indian mutual funds to charge investors and disclose their expenses and show their governance starting from 1 April 2026. The overhaul replaces the familiar, all in Total Expense Ratio (TER) construct with a Base Expense Ratio (BER) centric model, introduces optional performance linked fees and tightens the roles of trustees, boards and senior management.

SEBI’s stated objectives are investor protection, transparency and better alignment of AMC incentives with long term outcomes, but the changes will also force AMCs and distributors to rethink pricing, product design and distribution economics. The regime signifies better transparency to investors and institutional allocators by showing them their investment management expenses together with their trading and legal requirements costs, which will lead to decreased operational expenses across all expense categories.

2. From TER To Base Expense Ratio

What TER Looked Like So Far

Under the earlier regime, most scheme level costs investment management fees, brokerage, securities transaction tax (STT), exchange fees, depository charges and several recurring expenses which were aggregated into a single TER figure, with category wise caps that varied by AUM slabs and plan types. For many investors, that single percentage acted as a shorthand for “what this fund costs”, even though it bundled very different economic drivers.

How BER Re anchors Pricing

From April 2026, SEBI requires AMCs to disclose a BER that represents only the fee charged by the AMC for managing investors’ money, while other levies are to be shown separately. In practice, TER continues to exist, but now as an aggregate of: (a) BER, (b) brokerage and transaction costs (subject to revised caps), and (c) statutory and regulatory levies such as STT, stamp duty and GST, which sit outside the BER limit.

The unbundling process enables investment professionals and gatekeepers to compare pure management fees across different schemes and categories while they learn about the cost effects of trading and portfolio management. AMCs and platforms will have to rework how they present fee information in offer documents, fact sheets, KIMs and digital interfaces, since line item disclosures and periodic updates will now need to mirror the BER plus charges architecture.

3. Lower Expense Caps And Performance Linked Fees

Tighter Caps On Brokerage And Expenses

In parallel, SEBI has rationalised and, in several cases, reduced the effective caps that apply to scheme level expenses and brokerage. The market research results show that cash market brokerage limits will decrease to approximately 6 basis points from their current 8 to 12 basis points range while derivatives brokerage limits will drop to 2 basis points from their previous 3 to 5 basis points range because exit load linked add ons will no longer exist.

For AMCs, this means less room to accommodate high touch trading strategies or generous broker commissions within the investor facing expense figure. For distributors and execution partners, it underscores the trend towards leaner, more transparent pricing of trading and distribution services.

Optional Performance Linked BER

The more structurally significant change is the introduction of an optional performance linked BER model. Mutual fund schemes may now opt to charge a base expense ratio that varies with performance, subject to conditions that SEBI will specify in detail including benchmark selection, look back periods, disclosure norms and investor communication.

While the granular rules will sit in regulations and circulars, the emerging framework suggests a few non negotiables:

1. organizations must provide their performance-based formula details through their marketing materials and offer documents.
2. No unilateral midway introduction of performance linked charging without appropriate consents or exit options.
3. Benchmarks and look back periods that are objective and not cherry picked for volatility.
4. Symmetry and high water mark type protections, so that investors are not effectively paying extra for short term spikes.

The combination of lower flat caps with their ability to earn additional revenue through better net outcomes will create revenue uncertainty for AMCs. The new economic conditions which result from this change will force AMCs to develop unique operational strategies. For investors, especially institutional allocators and fee sensitive retail flows, this creates scope to negotiate share classes and mandates that more closely align costs with realised performance, though the transitional period will likely see considerable diversity in how quickly different complexes adopt performance linked models.

4. What Expenses Can (And Cannot) Be Charged To Schemes?

Scheme Level Expenses That Remain Permissible

SEBI has also used the 2026 regulations and accompanying circulars to clarify which costs may be charged at the scheme level and which must be absorbed by the AMC. Broadly, ongoing operational expenses that are directly attributable to running the scheme which are registrar and transfer agent fees, custodian charges, listing fees and standard marketing within prescribed limits, can continue to be charged within the permitted BER and TER constructs.

The overall limits allow for trail commission payments and legitimate distribution costs to be claimed as valid expenses, but SEBI now moves towards a system which establishes clear boundaries between advisory and distribution costs and portfolio management and execution expenses. AMCs will need granular expense mapping and internal cost allocation policies to evidence that only eligible items find their way into investor facing charges.

Costs Pushed Back To The AMC

On the other hand, several categories of costs are either capped more tightly or pushed back to the AMC. Excess brokerage and transaction costs beyond the revised bps ceilings cannot simply be passed through to investors and will have to be borne by the AMC or offset elsewhere. One off items such as penalties for regulatory non compliance, expenses relating to general corporate branding of the sponsor or AMC, and unrelated group level overheads are expected to remain non chargeable at the scheme level.

The distributors who work with higher commission segments need these clarifications because they should select advisory services which provide clear pricing or platform fee structures which can pass both regulatory tests and investor evaluations. The way that fintech platforms and wealth managers market their "zero commission" and "direct plan" products in the market will gradually change because of this development.

5. Trustees, Boards And Senior Management

Expanded Role For Trustees

The 2026 framework explicitly expands the responsibilities of trustees in overseeing how investor money is charged and managed. SEBI’s board materials and subsequent notifications emphasise that trustees are expected to move beyond a box ticking approach and actively question whether expense structures, brokerage practices and performance linked mechanisms are fair and in the interest of unit holders.

Trustees will need to review periodic analytics on expenses and performance, assess whether any category of investor is being disadvantaged, and ensure that disclosures are not just technically compliant but also understandable. This will likely require more frequent and data rich reporting from AMCs, and a stronger governance dialogue between trustees, independent directors and senior management.

Board And KMP Accountability

AMC boards, in turn, are expected to institute internal policies on fee setting, broker empanelment and conflict management, and to embed these into their risk management and internal audit frameworks. Key managerial personnel i.e., CEOs, CIOs, heads of compliance and risk, will find their individual accountability heightened, as SEBI has signalled that it will not hesitate to escalate issues of mispricing, mis disclosure or abusive practices to named individuals.

In practice, this will translate into more detailed board and trustee minutes around fee related decisions, tighter documentation of how benchmarks and performance fee triggers are chosen and more structured oversight of distribution incentives. AMCs that treat these requirements as an opportunity to formalise and evidence their decision making process are likely to be better placed in both inspections and market perception.

Operational Changes For AMCs And Distributors

Beneath the high level policy shifts lies a long list of operational adjustments that AMCs and distributors will need to execute before and after 1 April 2026. Systems and processes for calculating and disclosing BER, TER and individual expense components will have to be redesigned, tested and integrated across RTA platforms, fund accounting, websites and distributor portals.

Offer documents, KIMs, SID/SAI, fact sheets and marketing materials will need to be updated to reflect the new caps, the BER plus charges structure and, where relevant, the mechanics of any performance linked arrangements. AMCs that intend to offer performance linked fee options or differentiated share classes must build in clear investor communication strategies, including illustrations, FAQs and risk factors, to reduce the scope for mis selling or post facto disputes.

On the distribution side, platforms and intermediaries will have to reconfigure how they display fee information, compare schemes and generate portfolio analytics for clients. Commission structures may also need to be revisited to ensure that they are sustainable within the tighter expense framework and are not perceived as undermining SEBI’s investor protection objectives.

Impact For Investors, AMCs And Market Structure

For retail and HNI investors, the immediate effect of the new regime is likely to be clearer visibility on what they are paying for and, over time, modestly lower all in costs in several high expense pockets. The ability to distinguish between pure management fees, trading related costs and statutory levies should help more sophisticated investors and advisors make better product and category choices, particularly when comparing active funds to passive alternatives.

For AMCs, the combination of lower caps, unbundling and governance expectations will compress margins and reward scale, operational efficiency and truly differentiated performance. Bigger organizations which possess advanced systems and strong brand value will find it simpler to implement and test performance based share class systems, whereas smaller AMCs must decide between two options which include repositioning their business or developing specialized areas or pursuing either business mergers or strategic partnerships.

Distributors and platforms will sit at the centre of the transition, as investors increasingly rely on them to interpret the new disclosures and to navigate the spread of fee structures. Those that can provide independent, analytics driven comparisons and facilitate transparent pricing discussions may strengthen their role, while purely commission driven models are likely to come under greater scrutiny.

Over the medium term, SEBI’s 2026 mutual fund overhaul is best seen as part of a broader shift in India’s securities regulation towards unbundling, transparency and accountability. AMCs that invest early in governance, systems and investor communication should be better placed not only to comply, but also to use the new framework to differentiate themselves in an increasingly competitive market.

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