India’s market watchdog publishes circular on mutual fund scheme structuring

India’s market watchdog publishes circular on mutual fund scheme structuring

India’s Market Regulator Issues Circular on Mutual Fund Scheme Structuring

The Securities and Exchange Board of India (SEBI) has issued a revised master circular outlining structural and cost-related changes for mutual fund schemes, aiming to enhance transparency and investor clarity. The updates, effective as of June 2024, restructure expense frameworks, redefine scheme classifications, and streamline compliance requirements.

A key reform introduces the Base Expense Ratio (BER), which separates core fund management fees from statutory and regulatory levies. Previously, expenses such as securities transaction tax, GST, and exchange fees were bundled into the total expense ratio (TER), obscuring the actual cost to investors. Under the new framework, the BER will reflect only the fund house's operational costs, while statutory charges are disclosed separately. This change applies across all fund categories, including equity, debt, and hybrid schemes.

Expense caps have been adjusted to align with the revised structure. For instance, index funds and ETFs now face a BER limit of 0.9% (down from 1%), while fund-of-funds schemes investing in equity-oriented funds have a 2.10% cap, reduced from 2.25%. Close-ended equity funds also see tighter limits, with BER capped at 1% compared to the prior 1.25%. Additionally, brokerage limits in cash markets have been lowered to 6 basis points (from 12 basis points previously), excluding statutory levies.

The circular also reclassifies mutual fund schemes into five standardized categories—large cap, mid cap, small cap, and others—using uniform definitions to improve comparability and investor understanding. Compliance requirements have been simplified, including reduced frequency of trustee meetings and streamlined portfolio disclosure norms.

While the changes may not immediately reduce headline costs, they promote cost discipline and transparency by eliminating hidden fees and clarifying expense components. SEBI emphasized that the adjustments balance investor protection with operational feasibility for asset management companies.

Investors are advised to review updated scheme documents to understand the revised cost structure and classification standards. The circular underscores SEBI's ongoing efforts to modernize mutual fund regulations and align them with global best practices.

Economic Times, June 2024: Explained SEBI revises mutual fund expense fee
Scribd, 2023 Guidelines: Guidelines-Sebi