Costs such as know your customer (KYC) charges and depository fees are largely fixed in nature since they are levied on each onboarded investor. In addition, there are fixed transaction platform charges. All of these remain the same regardless of the size of assets managed. This creates a structural mismatch at a time when mutual fund expense ratios fall as assets grow, squeezing margins for fund houses.
Expense ratio, charged as a percentage of assets under management or AUM, is the fee paid by investors to mutual funds, part of which goes towards operational and management costs and the rest towards distributor commissions. Markets regulator Securities and Exchange Board of India, or Sebi, has in recent months capped expense ratios, trimmed brokerage costs, and restructured the disclosure of fees charged by asset management companies (AMCs)—with the intent of reducing costs for investors.
“Discussions between the Association of Mutual Funds of India (Amfi) and Sebi to reduce fixed costs for mutual funds are ongoing. Many of these charges were set a long time ago and the effort is to try and see how costs can be reduced for fund houses as it will help improve their income,” said a person with direct knowledge of the discussions.
The industry has been engaging with service providers such as KYC Registration Agencies (KRAs) and depositories, as well.
“We have been talking to all the providers also like KRAs and depositories saying that a mutual fund’s expense ratios can be telescopic in nature, then the entire cost chain has to be telescopic in nature,” said an AMC official.
The “telescopic” reference was to how a scheme’s expense ratio automatically comes down as assets grow. However, industry executives said that fixed components embedded within this ratio do not vary by scale, creating pressure particularly for smaller schemes and newer fund houses.
A burden as Sebi trims costs
The discussions come a month after Sebi cut brokerage and transaction costs for mutual funds and tightened the overall total expense ratio (TER) framework. The regulator capped brokerage costs in the cash market at 6 basis points (bps), down from 12 bps in the cash markets, and at 2 bps in derivatives, compared with the earlier 5 bps. It also removed the additional 5 bps that could earlier be charged over exit loads. These changes will take effect from 1 April 2026.
One bps is one-hundredth of a percentage point.
Under the revised framework, the base expense ratio (BER) will exclude statutory levies such as securities transaction tax, commodities transaction tax and goods and services tax. The TER will instead be disclosed as a combination of BER, brokerage, regulatory levies and statutory charges, a move aimed at improving transparency and avoiding double counting.
The revised expense ratio rules are expected to benefit smaller schemes more than larger ones, as funds with lower AUM typically charge higher expense ratios to offset the lack of scale. For an equity scheme with assets up to ₹500 crore, the maximum expense ratio that an AMC can charge is 2.1%. When the assets are over ₹50,000 crore, the maximum an AMC can charge is 0.95%.
The burden of fixed costs is most visible in small-ticket investments. To onboard a new investor, an AMC pays around ₹35 to KRAs, irrespective of the investment amount. In addition, AMCs pay about ₹11 per ISIN per investor annually to depositories as custody charges. An ISIN, or International Securities Identification Number, uniquely identifies a security such as a mutual fund or exchange-traded fund held in demat form.
Take, for instance, an investor with a ₹500 monthly systematic investment plan. An AMC earns roughly 0.3% annually on that investment, excluding distributor payouts and operating expenses. That is, ₹18 a year. At that rate, it will nearly two years for the AMC to just recover the fixed KYC costs.
Emails sent to Sebi, Amfi, National Securities Depositories Ltd (NSDL), Computer Age Management Services (CAMS) and Kfin Technologies remained unanswered. Central Depository Services (India) Ltd declined to comment. NSDL and CDSL are depositaries who charge mutual funds a custody fee. CAMS and Kfin are KRAs who charge for KYC related services.
The cap on TER kicking in from fiscal 2027 will help investors, for sure, but the effect of reducing fixed costs may not be passed on to them, an expert pointed out. “This is similar to cutting GST on automobiles, but automobile companies pump up the prices of cars to not pass on the cuts to customers,” said Ananya Roy, founder of Credibull Capital and a registered investment adviser.
