SEBI's Brokerage Fee Reforms: Impact on Mutual Fund Landscape and Retail Investor Behavior

The Securities and Exchange Board of India (SEBI) has embarked on a transformative overhaul of the mutual fund fee structure, aiming to reduce investor costs while navigating the delicate balance between cost transparency and market ecosystem sustainability. As of November 2025, the regulator is recalibrating its 2023 reforms, which proposed slashing brokerage fees and redefining expense ratios, in response to industry concerns about revenue erosion and research access. This recalibration underscores a broader tension: how to prioritize investor-centric cost reductions without destabilizing the financial infrastructure that supports market efficiency and innovation.

Investor-Centric Cost Reduction: A Win for Retail Investors

SEBI's reforms have delivered tangible benefits for retail investors. By reducing the base expense ratio (BER) for index funds and exchange-traded funds (ETFs) from 1.0% to 0.90% and lowering cash market brokerage caps from 8.59 basis points to 6 basis points, the regulator has directly reduced the cost of investing. These changes, combined with the exclusion of statutory levies like securities transaction tax (STT) and GST from the total expense ratio (TER), have enhanced transparency, enabling investors to compare fund costs more accurately. For example, equity-oriented schemes now face BER caps as low as 0.95% for funds with assets exceeding ₹50,000 crore, a significant drop from the previous 2.10% for smaller funds.

The compounding effect of these reductions is particularly impactful for long-term investors. A 0.15% cut in the TER for an equity fund could translate into thousands of rupees in savings over a decade, assuming an average annual return of 12%. Additionally, the proposed performance-linked fee structure-allowing asset management companies (AMCs) to charge higher fees for outperforming benchmarks-aims to align fund manager incentives with investor returns. While this model is more feasible for closed-ended funds and portfolio management services, its introduction signals a shift toward rewarding value creation.

Market Ecosystem Sustainability: Industry Pushback and Regulatory Flexibility

Despite these benefits, the reforms have sparked concerns about the sustainability of the market ecosystem. AMCs and institutional brokers argue that drastic reductions in brokerage fees-such as the proposed 12 basis points to 2 basis points for cash market transactions-threaten their ability to fund high-quality research and maintain competitive stock selection capabilities. A Reuters report highlights that industry stakeholders fear these cuts could erode the quality of research, ultimately harming investor outcomes.

SEBI, however, has shown flexibility. As of November 2025, the regulator is considering revising the proposed brokerage caps upward to address these concerns, with public consultations closing on November 17. This openness reflects a recognition that while cost reduction is critical, it must not come at the expense of market integrity. For instance, the exclusion of statutory levies has already been implemented, but the final shape of brokerage fee caps remains under negotiation.

The Path Forward: Balancing Innovation and Affordability

The challenge for SEBI lies in harmonizing these competing priorities. On one hand, lower fees and greater transparency empower retail investors, fostering a more inclusive financial ecosystem. On the other, AMCs and brokers require sustainable revenue models to support innovation, such as advanced risk analytics and ESG integration. The regulator's proposed performance-linked fees could serve as a middle ground, incentivizing AMCs to deliver value while allowing them to retain margins for superior performance.

For investors, the reforms necessitate a more discerning approach. With expense ratios now more transparent, retail investors must focus on net returns-comparing funds not just on cost but on performance adjusted for fees. Meanwhile, AMCs must adapt by leveraging technology to reduce operational costs and explore alternative revenue streams, such as co-investment opportunities for Category I & II Alternative Investment Funds.

Conclusion

SEBI's brokerage fee reforms represent a pivotal step toward an investor-centric market, but their success hinges on the regulator's ability to balance cost reduction with ecosystem sustainability. As of November 2025, the finalization of brokerage caps remains pending, with industry feedback shaping the outcome. For now, the reforms have already delivered significant benefits to retail investors, while the broader debate over market sustainability continues to evolve.