By Dr Rachana Baid & Dr V Shunmugam
India’s market infrastructure has reinvented itself with each technological leap. This evolution has been matched by an extraordinary deepening of mutual fund participation. Over the past decade, folios have expanded nearly sixfold — from approximately 39 million to over 234 million —and the industry AUM has grown from Rs 8 trillion to more than Rs 75 trillion, compounding at an annual rate of over 20%.
Yet, despite this surge in scale and digital efficiency, total expense ratios (TERs) have remained largely unchanged, often clustering near regulatory ceilings, particularly for equity funds that derive more than 80% of their assets from individual investors.
So, a review of TERs is not just timely, it is essential to ensure that the benefits of scale flow back to investors and strengthen India’s investment-led growth engine.
Sebi’s recent proposal to revise TER norms directly addresses this imbalance. The proposal removes the extra 5 basis points (bps) fee allowed for schemes with exit loads. It also reduces the permissible brokerage limits — dropping them to 2 bps for cash market transactions and 1 bps for derivatives — while excluding statutory charges, such as GST, STT, and stamp duties, from TER caps.
How much could this move boost investments?
While the exact behavioural response of investors to lower TERs depends on multiple factors, the primary effect is immediate savings. Consider this: A 5-bps reduction on an AUM of Rs 77.78 trillion results in annual investor savings of about Rs 3,889 crore. Add indirect benefits from reduced brokerage and transaction costs to this, and total savings could conservatively reach Rs 7,000 to Rs 8,000 crore per year. If even a portion of these savings — say 60% — is reinvested within the investment ecosystem through mutual funds or related financial instruments, it could generate additional flows of nearly Rs 5,000 crore.
The growth effect: Multiplying the momentum
From a macroeconomic perspective, these incremental investments are not just financial flows, they are drivers of growth. India’s fiscal multiplier, especially for capital expenditure, has been between 1.5 and 2 in recent Budget cycles. Using a conservative multiplier of 1.5, the Rs 5,000-crore reinvestment boost could result in a GDP increase of approximately Rs 7,500 crore. Although not transformative in itself, this gain is recurring and accumulative.
India in global context: Still paying more
India’s mutual fund costs remain high compared to global standards. In the US, the Investment Company Institute reports that the asset-weighted average expense ratio for equity mutual funds has decreased from 1.04% in 1996 to approximately 0.40% in 2023. Bond funds are even cheaper at around 0.37%, and index ETFs often charge less than 0.10%. In Europe and the UK, regulations like MiFID II have also promoted greater transparency and reduced product costs. In contrast, even after Sebi’s proposed changes, active equity mutual funds are expected to stay mostly within the 1.5%–2% TER range, while debt funds will typically be around 0.75%–1%. The difference is significant and unsustainable. If Indian investors want to remain loyal to domestic funds instead of cheaper global or passive alternatives, costs must become competitive.
Industry impact: From cost coverage to capability building
For AMCs and intermediaries, this proposal isn’t just about squeezing margins — it’s a pivotal moment. Old cost structures, especially in marketing, distribution, and investor servicing, will need to be reconsidered. However, this doesn’t mean profitability has to decline. In fact, many leading firms already show that automation, digital onboarding, and algorithmic portfolio management can lower unit costs while boosting efficiency. For the brokerages, too, balance sheets have shifted from revenue from institutional execution services to various other value-adds.
Distributors and platforms will also need to shift from commission-heavy models to more customer-focused, experience-driven approaches. This is where innovations such as AI chatbots, automated KYC, and algorithmic risk profiling can cut costs for acquisition and service while expanding reach.
Active vs passive: A recalibration, not a collapse
The pressure on fees will also speed up a shift already underway — the rise of passive investing. Index funds and ETFs are gaining popularity, especially among younger and institutional investors. Their lower costs and predictability make them attractive options.
This, however, does not signal the end of active management. Instead, it marks the end of undifferentiated, high-cost active management. For AMCs with proprietary in-house research, particularly in sectors or market segments not easily tracked by indices, active strategies will remain important. The real challenge is justifying fees through consistent outperformance and unique insights—not through marketing strategies or theme chasing. If anything, rationalising TERs will act as a filter: Eliminating commoditised active products while strengthening those built on genuine intellectual capital.
Redefining trust and participation
Mutual funds in India have always been associated with accessibility and simplicity. The “Mutual Funds Sahi Hai” campaign has greatly expanded its investor base. However, increasing participation now depends on a new level of trust—one rooted not only in product appeal but also in cost transparency and investor-first design. By unbundling statutory charges, capping commissions, and enforcing clear expense disclosures, the regulator is strengthening the agreement between investors and intermediaries.
Rebalancing for resilience
Perhaps most crucially, the proposal comes at a time when India’s macroeconomy needs dependable, long-term sources of capital. With global capital flows becoming more volatile, India must develop its own investment base. Domestic mutual fund investors are best positioned to fill this role. To do so, the system must be lean, fair, and aligned. TER rationalisation is not about punishing fund houses or advisors; it’s about modernizing the structure so that costs reflect the services provided, and scale results in savings.
Costs — growth catalyst
India’s growth story is still unfolding, and capital markets remain at the heart of that. However, to fully realise the potential, participation must expand and offer rewards. This is what makes the TER revamp proposal both timely and transformative. By reducing friction costs, increasing investor returns, and encouraging industry innovation, the reform paves the way for a more inclusive and efficient investment ecosystem. It transforms cost-cutting from a defensive move into a growth driver. If implemented clearly and purposefully, this reform could be remembered not just as a regulatory adjustment but as a fundamental shift in how India channels its savings into sustainable growth.
(Authors are dean, National Institute of Securities Markets; and partner, MCQube. Views are personal )
