SEBI’s New Mutual Fund Expense Ratio Caps: What Changes for Investors in 2026

Mutual fund investors usually compare returns, ratings and fund managers before selecting a scheme. Costs often receive less attention, even though they are deducted from the scheme’s assets and affect the net asset value available to investors.

The Securities and Exchange Board of India introduced a revised expense framework through the SEBI (Mutual Funds) Regulations, 2026. The regulations were notified in January 2026 and became effective from April 1, 2026. One of the most visible changes is the introduction of the Base Expense Ratio, or BER.

The objective is to make mutual fund costs easier to understand by separating the fund’s core operating expenses from eligible transaction costs and statutory levies. However, investors should not assume that a reduction in a regulatory ceiling will produce an equal reduction in every scheme’s final expense ratio.

What Is a Mutual Fund Expense Ratio?

A mutual fund incurs costs for investment management, research, administration, distribution, record-keeping, technology, compliance and investor communication. These expenses are charged to the scheme rather than collected through a separate annual bill.

The expense ratio expresses the annual recurring cost as a percentage of the scheme’s average daily net assets. It is reflected in the scheme’s NAV. Therefore, the returns displayed to investors are normally after the applicable expenses have been deducted.

Consider a simplified illustration. If a portfolio earns a gross return of 10% and total annual expenses are 1.5%, the investor’s return would be lower than the gross portfolio return. The actual difference will depend on the timing and calculation of expenses, so this example should not be interpreted as an exact return formula.

What Is the New Base Expense Ratio?

Under the 2026 framework, BER represents the base expenses incurred in operating and managing a mutual fund scheme. It may cover areas such as the investment-management fee, administration and permissible distribution-related costs.

The Total Expense Ratio remains the broader measure of costs ultimately charged to the scheme. Under the revised structure, it can be understood broadly as:

TER = BER + permitted brokerage costs + applicable statutory and regulatory levies

Eligible levies may include GST, Securities Transaction Tax, Commodities Transaction Tax, stamp duty, SEBI fees, exchange charges and clearing-related costs, as applicable.

This separation is important because such costs can arise from trading activity or legal requirements rather than the AMC’s management fee alone. Investors can now obtain a clearer picture of what the fund house charges for running the scheme and what the portfolio incurs through transactions and mandatory levies.

How Have the Expense Limits Changed?

SEBI reduced the base expense ceilings for several mutual fund categories. For an open-ended equity-oriented scheme with assets of up to ₹500 crore, the maximum BER is 2.10%. Under the earlier framework, the corresponding TER ceiling was 2.25%.

For the next AUM slab of ₹500 crore to ₹750 crore, the maximum equity-scheme BER is 1.90%. For ₹750 crore to ₹2,000 crore, the ceiling is 1.60%. The permitted percentage generally decreases as the scheme’s assets become larger.

Separate limits apply to non-equity schemes and specialized products. For example, open-ended index funds and exchange-traded funds have a maximum BER ceiling of 0.90% under the new regulations. Different limits apply to close-ended schemes and various types of fund-of-funds.

These percentages are regulatory maximums, not compulsory charges. An AMC may charge less than the permitted ceiling. Investors should check the latest scheme disclosure rather than assuming that every fund charges the maximum amount.

Why Does Fund Size Affect the Ceiling?

The slab-based system attempts to pass some benefits of scale to investors. When a scheme grows, several operating expenses may be spread across a larger pool of assets.

For example, a fund managing ₹20,000 crore does not necessarily require 20 times the administrative infrastructure of a fund managing ₹1,000 crore. A lower percentage ceiling for larger schemes reflects this potential operating efficiency.

Fund size alone, however, should not decide an investment. Very large schemes may have advantages in cost and resources, but the fund’s strategy, liquidity needs and investment universe also matter.

Does a Lower BER Guarantee Higher Returns?

No. Lower expenses can reduce the amount deducted from a scheme, but they cannot guarantee higher returns or protect investors from market losses.

A scheme with lower costs may still underperform because of portfolio choices, market conditions or tracking error. Similarly, an actively managed scheme with a higher expense ratio may or may not justify that cost through better risk-adjusted performance.

The revised BER caps should also not be directly compared with old TER ceilings without recognising the change in structure. Some brokerage expenses and statutory levies are now treated separately. Consequently, the reduction in BER may not match the movement in the final TER reported by a scheme.

Direct Plans and Regular Plans

Investors should also understand the difference between direct and regular plans. Both plans generally hold the same underlying portfolio, but a regular plan includes distribution-related costs or commissions. A direct plan does not include distributor commission and normally has a lower expense ratio.

This does not automatically make a direct plan suitable for everyone. Investors using a direct plan must research, select and monitor funds independently. Those who need personalized guidance should consider consulting a properly qualified and registered professional.

How Can Investors Check the Actual Cost?

Before investing, examine the scheme’s latest factsheet, TER disclosure, Scheme Information Document and Key Information Memorandum. The AMC’s website should provide the current expense ratio for direct and regular plans.

Do not rely entirely on a promotional advertisement or an old comparison table. Expense ratios can change as assets, operating costs and regulatory conditions change.

Investors can also refer to the official SEBI (Mutual Funds) Regulations, 2026 for the regulatory framework.

What Is the Practical Takeaway?

The 2026 regulations improve transparency by distinguishing the base cost of managing a mutual fund from transaction expenses and statutory levies. Reduced ceilings may benefit investors, particularly over long holding periods, but cost should remain one part of a wider evaluation.

A mutual fund should be assessed on its objective, portfolio, risk level, consistency, expense ratio, tracking difference where relevant and suitability for the investor’s goals. Low cost is valuable, but it cannot compensate for an unsuitable or poorly understood investment.

Disclaimer: This article is for educational and informational purposes only. It is not investment, legal or tax advice. Mutual fund investments are subject to market risks. Regulations and scheme expenses may change; investors should review current official disclosures and consult an appropriately qualified professional before investing.