Mutual Fund Fee Overhaul Sparks Broker Backlash

The Securities and Exchange Board of India (Sebi) has initiated a significant proposal to reshape how mutual funds calculate their total expense ratios (TER). A consultation paper released on October 28 suggests excluding statutory levies like securities transaction tax and stamp duty. Concurrently, Sebi is looking to drastically reduce broker commissions, from 12 basis points to 2 bps for cash market trades and from 5 bps to 1 bps for derivatives.

This proposed fee reduction is primarily driven by the goal of ensuring investors do not incur redundant costs for research services. Currently, investors might be paying for research both through brokerages and the mutual fund asset management company's own research efforts. The new rules aim to streamline this and offer greater cost efficiency.

However, this regulatory shift has encountered considerable resistance from sell-side brokers. These entities provide crucial research and execute trades for mutual funds. The proposed commission caps threaten a key revenue source for brokers and may compel mutual funds to invest more in developing their own research teams, potentially leading to increased operational expenses for fund houses.