The SEBI (Mutual Funds) Regulations of 2026 represent a major paradigm shift in the regulation of mutual funds in India. The regulations have been introduced by SEBI and aim at replacing the existing framework under the regulations of 1996 with a stronger focus on transparency, investor protection, rationalization of costs, and easy compliance. The regulations are a move by SEBI to align the Indian regulations for mutual funds with current industry practices and international requirements for a clearer and more transparent operating cost structure for mutual fund products offered to investors. The overall thrust of the regulations would be ensuring better regulation norms while maintaining investor protection measures intact.
Background
The SEBI (Mutual Funds) Regulations, 2026, were a result of a complete overhaul of the outdated structure from 1996, in light of the rapid rise of the mutual fund industry in India, which managed over ₹60 lakh crore in 2025. The original SEBI (Mutual Funds) Regulations were introduced in 1993 and had become opaque and cumbersome after a series of amendments and other provisions added to it over the years.
Historical Evolution
The history of mutual funds in India goes back to the 1960s with public sector UTI units; however, opening for the private sector came after setting up SEBI in 1993 and regulations of 1996. Over the years, mutual funds circulars covered various areas such as expense ratios and risk measures; however, fragmentation increased the length of a mutual fund document to a whopping 162 pages by 2025, for which SEBI brought out a consultation paper in October 2025.
REVIEW PROCESS
As part of this, SEBI initiated a comprehensive overhaul in late 2025, where it analyzed feedback regarding cost structures, broking, and operations, resulting in Board approval on December 17, 2025. These initiatives ensured that the basic norms were preserved while cutting unnecessary verbosity by 54%.
Industry Triggers
The need for a swift increase in AUM, concerns over mis-selling, demands for cost disclosures, fueled by TERs, and so-called hidden charges, called for a change in accordance with global best. Against this backdrop, the adoption of regulations in 2026 stands out as an important moment in sustainable market development.
KEY CHANGES
- Simplified language and greater transparency: The 1996 MF Regulations are almost 30 years old and thanks to the various amendments from time to time have acquired an extensive and layered regulatory structure. SEBI’s Board has promised that the New Draft MF Regulations shall offer stakeholders greater clarity, improved readability, and enhanced structural coherence.
Some of the key highlights of the New Draft MF Regulations are the rationalization of expense ratios, capping of brokerage costs, and introducing greater transparency in the fee structure of mutual funds. - Overhaul of the Expense Ratio framework:
- Total Expense Ratio (“TER”) is not defined in the 1996 MF Regulations. However, it is widely used across the 1996 MF Regulations and is utilized to cap the expenses of the scheme that the mutual fund can claim from its investors. For example, Regulation 52(6)(a)(i) of the 1996 MF Regulations states that “in case of fund of funds scheme – investing in liquid schemes, index fund scheme and exchange traded funds, the total expense ratio of the scheme, including the weighted average of the total expense ratio levied by the underlying scheme(s), shall not exceed 1.00 per cent of the daily net assets of the scheme”.
- At the Board Meeting, SEBI clarified that ‘Total Expense Ratio’ shall be the sum of BER, brokerage, regulatory levies and statutory levies. SEBI has now introduced the term ‘base expense ratio’ (“BER”), which, as per Regulation 65 of the New Draft MF Regulations is the sum of (i) investment and advisory fees charged to the scheme by the AMC, and (ii) recurring expenses of the scheme, but excludes GST and other applicable statutory levies on the said expenses, if any, and transaction costs incurred for the purpose of execution of a trade. Regulation 66(2) of the New Draft MF Regulations provides that investors can only be charged the base expense ratio, brokerage cost, transaction cost, statutory levy and exit load, if applicable.
Scheme Type | Old TER Cap | New BER Cap |
Index Funds/ETFs | 1.00% | 0.90% |
Close-Ended Equity | 1.25% | 1.00% |
Liquid FoFs | 1.00% | 0.90% |
- The 1996 MF Regulations had caps on TER. SEBI has now specified caps on BER and these caps are lower than the caps under the 1996 MF Regulations. For example, for index funds and ETFs, the cap is reduced from 1.00% of TER to 0.90% of BER. For fund‑of‑funds (FoFs) investing in liquid schemes, index funds and ETFs, the cap is reduced from 1.00% of TER to 0.90% of BER. For equity‑oriented schemes.
- Reduced Brokerage and transaction costs: The 1996 MF Regulations permitted AMCs to charge brokerage and transaction costs incurred for the purpose of execution of trade up to 0.12 per cent of (12% bps) for cash market transactions and 0.05 per cent (5 bps) for derivatives transactions. The 2026 Regulations cap brokerage at 6 bps (cash market) and 2 bps (derivatives), exclusive of statutory levies. All STT/CTT/GST/stamp duty charged separately over limits
IMPACT CAUSED TO MARKET PLAYERS
SEBI (Mutual Funds) Regulations, 2026: These regulations are a paradigm shift for the Indian mutual fund industry, emphasizing transparency in expenses, ease of governance, and protecting unit holders. By slashing verbosity and embedding transparency, these regulations balance innovation with robust safeguards amid the sector’s surge past ₹60 lakh crore AUM.
Asset Management Companies (AMCs)
AMCs face significant margin compression from revised TER caps and brokerage rationalization. The new Base Expense Ratio (BER) framework excludes GST, STT, stamp duty, and SEBI fees—now charged separately—with caps reduced as follows [Table 1]: index funds/ETFs to 0.90% (from 1.00%), close-ended equity to 1.00% (from 1.25%), and liquid FoFs to 0.90%.
Brokerage limits tighten: cash market to 6 bps (from 12 bps), derivatives to 2 bps (from 5 bps), removing the 5 bps exit load allowance.
Analysts estimate 10-20 bps TER reduction potential for active equity funds (pre-reform average: 1.8-2.2%), prompting AMCs to optimize operations or shift to passive products.
Benefits include regulatory simplification—44% fewer pages (162→88), 54% fewer words (67k→31k). Tabulated prudential limits and reorganized AMC/trustee roles reduce audit burden. Streamlined sponsor eligibility lowers entry barriers, potentially driving 10-15% industry consolidation by 2028.
Investors (Retail & Institutional)
More than 10 crores retail investors experience unprecedented visibility on costs as the ‘BER’ sheds light on undisclosed fees, making it possible to compare schemes on an ‘apples to apples’ basis through the app or platform. The costs on passive investment schemes reduce to match global standards—index funds’ TER on par with the fees paid by the actively-managed schemes (0.9%) will perhaps increase SIP contributions of the current 25,000 crores a month to the mutual fund industry by 20-30%.
Distributors & Brokerages
The distributors are dealing with decreased commissions; equity brokerage commissions have been cut by 50%, while performance-linked incentives are now the norm for select plans to reduce mis-selling on volumes. Other online platforms like Groww, Zerodha Coin are vulnerable to risk-based oversight, leading to stricter customer fund segregation standards and increased operational costs by 5-10% for small RIAs. The best-performing distributors with in-built technology solutions will manage the transition through “value-added advisory services,” while the unorganized segment may quit the industry; the top 10 will command 70%++ market share.
Agent firms will see benefits from harmonized regulations that ease distribution of MFs alongside equities, while stricter limits will impact hybrid business models. Ethical distribution will receive support through reforms, leading to increased net investment due to reduced redemptions triggered by substandard investment advice.
However, in the case of active mutual fund investors, incremental savings are less probable, with AMCs transferring the effects of curb restraints of broking fees through clever structuring of fees. Institutional participants, including HNIs and FPIs, are indirectly beneficiaries of improvement in governance, including guidelines in risk-value valuation, repeal of REIT/IDF chapters (now separate), in respect of diminishing scheme multiplication. On the whole, changes will bring about psychological shifts in terms of prudent allocation against wrongly marketed high-fees, possibly causing equity AUMs to rise to 60% from the current 55%.
Trustees and Custodians
Trustees see a new role, with oversight consolidated thematically to reduce overlaps in liability but with more strict monitoring mandated of the AMC for expenses. Custodians see simplified valuation and disclosure norms to smoothen the reconciliation process amidst hybrid debt-equity schemes.
Ecosystem - Beyond the Marketplace
Mutual fund sector changes trickle down to capital markets: MFs become less expensive, continuing SIP in equities; IPO pipes get boost from relaxation in brokerage norms in tandem. Regulators succeed in attaining two-fold objective: investor protection in terms of transparency, industry maturation through scale. Time-tested strategy: short-term discomfort in margins/compliance adjustments pays off in the long run: expected double AUM to ₹120 lakh crores in 2030 with 40% share for passive funds.
CONCLUSION
The SEBI (Mutual Funds) Regulations, 2026, has been a revolutionary change in India’s mutual fund industry, replacing a complex 1996 regime. This has been approved on December 17, 2025, as it reduces redundancy by 44%(pages) and 54%(words), making it a transparent regime, striking a balance between innovation and strong safeguards in a market that has grown above ₹60 lakh crore + AUM.
Important Changes Recap
Key reforms are the Base Expense Ratio (BER) framework, with exemptions for GST/STT and fees, reduced to 0.9% for indexing instruments (from 1%) and for close-ended equity funds to 1%, coupled with reduced broking fees (equity cash to 6 bps from 12 bps). It reduces pages by 44% and words by 54%, restructures AMC/trust functions, removes chapters on REITs/IDFs, and puts the prudential norms in table forms.
Effects on Market Players
AMCs are affected by 10-20bps on margin costs but benefit from simpler governance structures as stocks rise 5-8.5% on the potential for consolidation. Investors achieve cost clarity and anti-churning safeguards, boosting SIP contributions; distributors migrate to performance-based compensations, which benefit larger platforms. Forward Outlook These developments signal a mature and competitive ecosystem, forecasting a doubling of AUM by 2030 while increasing retail trust and passive usage.
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Sanjay Mishra is a seasoned legal professional and content contributor at LEGALLANDS LLP, bringing deep expertise in corporate law, taxation, and regulatory compliance. With years of experience advising businesses on legal structuring and operational governance, he provides pragmatic insights that blend statutory knowledge with business strategy.
At Legallands.com, Sanjay writes analytical articles on company formation, financial regulation, dispute resolution, and policy reforms, helping readers understand complex legal frameworks in a simplified, practical manner.
His work reflects a strong commitment to clarity, precision, and integrity in legal communication, empowering enterprises to make informed, compliant, and growth-oriented decisions.
Co-author: Prerna
