In a major move aimed at benefiting retail investors, the Securities and Exchange Board of India (SEBI) has approved a reduction in mutual fund expense ratios by up to 15 basis points (bps). The decision was cleared during SEBI’s board meeting held on December 17, and it is expected to make mutual fund investing more cost-effective while improving long-term returns for investors.

Although the reduction may appear small at first glance, market experts believe that even a 10–20 basis points cut can create a meaningful difference in wealth creation over the long term due to the power of compounding.

What Has SEBI Changed?

SEBI has reduced the base expense ratio across various asset slabs and fund categories. For most higher asset slabs, the expense ratio has been lowered by 10 basis points, while certain categories have seen a reduction of up to 15 basis points.

For open-ended equity mutual funds with assets under management (AUM) of less than ₹500 crore, the maximum charge has been reduced from 2.25% to 2.10%. In the same AUM category, debt funds will now have a capped expense ratio of 1.85%.

Index funds and exchange-traded funds (ETFs) have also benefited. Their expense ratio has been reduced from 1.00% (including statutory levies) to 0.90% (excluding statutory levies). A similar reduction applies to fund-of-funds investing in liquid schemes, index funds, and ETFs.

Why This Matters for Investors

Expense ratio is the fee charged by mutual fund houses to manage investments. A lower expense ratio means more of your money stays invested, allowing it to compound over time.

SEBI’s move improves transparency and affordability, especially for retail investors who invest for long-term goals such as retirement, children’s education, or wealth creation. While the reduction may seem marginal annually, its impact over 15–20 years can be substantial.

TER Renamed as BER: What’s the Difference?

Another important change introduced by SEBI is in how costs are disclosed to investors. The Total Expense Ratio (TER) has now been renamed the Base Expense Ratio (BER).

According to investment experts, earlier TER included multiple components, which made it difficult for investors to clearly understand what they were paying for fund management. With the introduction of BER, SEBI has separated core fund management costs from statutory levies.

What Is Included in BER?

The Base Expense Ratio (BER) will now include only the actual cost of running the fund, such as:

• Fund management fees

• Distributor commissions

• Registrar and Transfer Agent (RTA) charges

Costs like GST, stamp duty, Securities Transaction Tax (STT), Commodities Transaction Tax (CTT), and regulatory or exchange fees will no longer be part of BER. These statutory charges will be shown separately.

In simple terms, BER reflects what the fund house charges, while TER reflects the final cost borne by the investor, including taxes and statutory levies. This change makes the cost structure clearer and more investor-friendly.

How Will This Impact Long-Term Returns?

Experts unanimously agree that lower costs can significantly boost long-term returns. Colonel Sanjeev Govila (Retd.), CEO of Hum Fauji Initiative, explains that investing is a long-term journey. When costs are reduced, more capital remains invested, which leads to stronger compounding benefits over time.

Example: How Much More Can You Earn?

Let’s understand this with a simple example.

• Suppose you invest ₹10 lakh as a lump sum

• The investment grows at 12% CAGR (before expenses)

• The expense ratio is reduced by 20 basis points

Over a period of 20 years, this small reduction in costs can result in additional wealth of nearly ₹2.95 lakh. This extra amount is purely a gain for the investor and comes solely from paying lower expenses—not from taking higher risk.

A Big Win for Retail Investors

SEBI’s decision is widely seen as a positive step toward making mutual funds more transparent, efficient, and investor-friendly. Lower expense ratios align with global best practices and reinforce the regulator’s focus on protecting retail investors’ interests.

For long-term investors, this change strengthens the case for staying invested and focusing on costs as a key factor while selecting mutual funds. Over time, even small savings on expenses can translate into meaningful gains.

In summary, SEBI’s expense ratio cut may look modest today, but for disciplined investors with a long-term horizon, it could make a significant difference to overall returns.