A small fee cut, big returns: The cost reform that could boost your MF portfolio

Yet as the industry grew, one element didn’t shrink as expected: costs. Total Expense Ratios (TERs) for many equity funds remained close to regulatory ceilings, even as scale improved and technology reduced distribution costs. For investors, these sticky expenses quietly drain long-term returns. But to see how much they matter, you first need to understand what an expense ratio is, and how a fraction of a percentage point can reshape long-term wealth. What expense ratios really mean A fund’s expense ratio is the percentage of assets deducted each year to cover management, operations, marketing, and distribution. A TER of 2%, for instance, means ₹2 is charged annually for every ₹100 invested. It sounds small, but compounding magnifies the bite over time. Take two investors putting ₹1 lakh into similar large-cap funds - one paying a 0.4% fee, the other 2.4%. Assuming identical 10% gross returns, the higher-cost investor ends the decade nearly ₹43,000 poorer. Seemingly tiny fees can reshape long-term wealth. Expense ratios vary by category. Liquid and money-market funds tend to be cheaper; equity and thematic funds are costlier because research and trading needs run deeper. Small- and mid-cap strategies also come with higher costs as managers dig harder for information and liquidity. What is the market regulator planning The Securities and Exchange Board of India (Sebi), in a consultation paper dated 28 October, proposed a more transparent, investor-friendly TER framework. The key changes include reducing TER caps (for example, lowering the equity fund ceiling from 2.25% to 2.10%), removing the extra 5 basis points allowed on exit load, tightening limits on brokerage and distribution charges, and separating statutory levies such as GST and stamp duty from TER caps so investors can see exactly what goes to the fund manager. The savings can be meaningful. Consider an investor putting ₹10,000 a month into an equity SIP (systemic investment plan) for five years - a total of ₹6 lakh. Now, assume two identical funds — one with a 2% expense ratio and another with 1.95%, a modest 5-basis-point (0.05%) difference that reflects Sebi’s proposed rationalization. While the gap seems small, over five years it can lead to an additional value of nearly ₹1,500- ₹2,000 for this single investor. Multiply that across millions of SIP accounts and the industry-wide savings run into several thousand crores each year. The global benchmark Globally, fund costs have trended steadily lower as competition and scale intensify. In the US, the average equity mutual fund expense ratio has fallen 62% since 1996, to around 0.4%. Large passive index funds now charge less than 0.10%. Europe’s stricter disclosure rules have produced similar results. India, by contrast, remains expensive: active equity funds often charge between 1.5% and 2% even after recent reforms. Cutting fees further would not only align India with global peers but also deepen trust among savers increasingly relying on mutual funds for long-term wealth creation. Who really pays more Individual investors, who now account for more than 87% of equity-scheme assets, bear most of these higher costs. Institutions dominate low-cost buckets such as liquid funds, debt funds, and exchange traded funds (ETFs). Direct plans, which bypass distributors, have helped reduce expenses, but gaps remain. In the large-cap category alone, direct-plan TERs can range from 0.4- 2.34%, a 200-basis-point spread that can materially alter future value. It’s a reminder to weigh costs as carefully as brand reputation or past performance. A market quietly rebalancing With fee pressure rising, India is seeing a gradual shift toward passive investing. Index funds and ETFs are drawing younger, cost-conscious investors who value simplicity and predictability. Active managers face tougher scrutiny: they must either deliver consistent alpha net of fees or move towards niche strategies where skill genuinely adds value. This reset ultimately works in investors’ favour, ensuring every rupee charged is justified. For most investors, the takeaway is simple. Before choosing a fund, check the expense ratio, not just the returns. Even narrow differences in annual costs can compound into meaningful gaps over time. And compare direct and regular plans; direct plans typically carry lower expenses and can meaningfully improve long-term outcomes. Leaner means stronger A leaner mutual fund system doesn’t mean bare-bones, but one that is efficient, transparent, and aligned with investors’ interests. Lower, more transparent TERs encourage investors to stay invested longer and strengthen trust in capital markets. They also help channel stable domestic savings into the ecosystem, reducing reliance on volatile foreign flows. The mutual fund industry is, by design, “mutual." As Manuel F. Cohen observed decades ago, its purpose is shared prosperity, not just management profit. Rationalizing costs is a step toward restoring that spirit.