SEBI Notifies Mutual Funds Regulations 2026 Overhaul
Why focus: 1996 MF rules overhaul taking effect April 2026 — GS3 Economy, tests regulatory jurisdiction and BER concepts
In News
What Happened
Why It Matters
Background
History & Context
What Changed
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Introduction of Base Expense Ratio (BER): Replaces the all-inclusive TER framework. Regulation 67 mandates that BER strictly covers the AMC's fund management and operating fees.
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Unbundling of Levies: Statutory taxes like GST, STT, and exchange fees are removed from the mutual fund expense cap and are now charged on actuals entirely outside the BER limit.
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Performance-Linked Fees Allowed: Under Regulation 66(7), AMCs are now permitted to charge performance-based fees on outperforming funds, subject to strict look-back periods and benchmark symmetry (clawbacks for underperformance).
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Slashed Brokerage Caps: Maximum brokerage limit is reduced from 12 basis points (bps) to 6 bps for cash market transactions, and from 5 bps to 2 bps for derivatives, ending the practice of bundling external research costs into trade execution fees.
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Removal of Exit Load Buffer: The extra 5 basis points expense allowance previously granted to schemes with exit loads has been completely eliminated.
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Lower Expense Caps for Passives: The BER limit for index funds and Exchange Traded Funds (ETFs) has been reduced to 0.90 percent, while close-ended equity fund caps fall to 1.00 percent.
What Did NOT Change
Despite heavy lobbying from Asset Management Companies to retain bundled soft-dollar commissions for distributor payouts, SEBI held firm on unbundling costs. However, the fundamental prudential norms and the foundational roles of Trustees and Sponsors remain structurally similar, and the concept of TER technically still exists as an aggregate disclosure metric rather than being completely erased.
Prelims Angle
NCERT Connection
Common Misconceptions
✗ Mutual fund expense limits and rules in India are set by the Reserve Bank of India since they handle public investments.
✓ SEBI holds exclusive regulatory jurisdiction over the mutual fund industry, including the setting of expense ratios, governance frameworks, and brokerage caps.
People often confuse the RBI's role in monetary policy and banking regulation with SEBI's mandate over capital markets and securities.
✗ The new Base Expense Ratio framework simply means mutual funds are fundamentally cheaper across the board.
✓ While minor cost reductions occurred, the primary shift is structural unbundling; statutory levies like GST are now charged outside the BER, making costs transparent rather than outright eliminated.
Media headlines highlighted 'TER cuts', failing to explain that certain costs were simply moved out of the percentage cap and billed separately.
Practice Questions
Q1
How Many CorrectConsider the following statements regarding the SEBI (Mutual Funds) Regulations 2026: 1. It replaces the bundled Total Expense Ratio with an unbundled Base Expense Ratio framework. 2. Brokerage caps for cash market transactions have been increased to 12 basis points to accommodate rising research costs. 3. Asset Management Companies are now strictly prohibited from charging performance-linked fees. How many of the statements given above are correct?
Q2
Match the FollowingMatch the previous cost framework (List I) with the newly notified SEBI 2026 MF Regulations framework (List II): List I (Provision) - A. Single inclusive expense metric; B. Exit Load Buffer; C. Cash market brokerage limit; D. Statutory levies like GST. List II (2026 Rule) - 1. Charged outside the core expense ratio limit on actuals; 2. Slashed to 6 basis points; 3. Completely removed; 4. Replaced by Base Expense Ratio (BER).
Q3
Assertion & ReasonAssertion (A): The SEBI 2026 Mutual Fund Regulations slashed the cash transaction brokerage cap from 12 basis points to 6 basis points. Reason (R): SEBI intended to stop AMCs from bundling third-party research and non-execution services into trade execution costs, which previously led to investors double-paying for research. Select the correct answer.