SEBI proposes performance-linked expense ratios. What are they?

The Securities and Exchange Board of India (SEBI), India's market regulator, has reportedly proposed an overhaul of the fee structurelinked to mutual funds. The regulator has suggested that the expenses of funds must be linked to how well they perform in the market.

The proposal aims at aligning fund manager incentives with investor interests and improving cost transparency across the over Rs 75 lakh-crore mutual fund industry.

What are performance-linked expense ratios?

According to ANI, SEBI has proposed the introduction of a provision for performance-linked expense ratios. If approved, this provision will allow asset management companies, the firms behind mutual funds, to charge variable fees based on fund performance. AMCs will be allowed to choose this model or stick with the previousbusiness model.

SEBI said a detailed framework will be finalised after consultations with industry stakeholders to ensure fair implementation.

The scheme is intended to ensure that costs reflect actual performance rather than being fixed charges irrespective of outcomes.

The market regulator has also proposed a reduction in brokerage and transaction charges for mutual fund trades. SEBI's consultationpaper noted that fund houses had been double-charging investors for the cost of research and also for bundled brokerage payments.

SEBI has suggested that the brokerage cap should be reduced from 12 basis points (bps) to 2 bps on cash market transactions and from 5 bps to 1 bp on derivatives trades. Taxes like Securities Transaction Tax (STT), Goods and Services Tax (GST), and stamp duty will be out of the expense ratio limits.

The regulator has sought public comments on the proposals by November 17, 2025, before finalizing the new rules.