Sebi, Amfi in talks to reduce KYC and depository charges for mutual funds
Sebi and Amfi are discussing reductions in fixed costs like KYC and depository charges for mutual funds to address structural profitability challenges. Fixed costs remain constant while expense ratios decrease with asset growth, creating particular pressure on smaller schemes. Recent regulatory changes include capping brokerage costs and restructuring expense ratios, effective April 2026.
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The Securities and Exchange Board of India (Sebi) and the Association of Mutual Funds of India (Amfi) are currently engaged in discussions to reduce fixed operational costs for mutual funds, including KYC charges and depository fees. These talks aim to address structural cost pressures facing fund houses as regulatory changes continue to impact industry profitability.
Fixed Cost Structure Creates Operational Challenges
Mutual fund companies face a fundamental mismatch between their cost structure and revenue model. Fixed costs such as KYC charges and depository fees remain constant regardless of the size of assets managed, while expense ratios—the primary revenue source—decrease as assets under management grow. This telescopic nature of expense ratios creates particular pressure for smaller schemes and newer fund houses.
The expense ratio, charged as a percentage of assets under management, represents the fee paid by investors to mutual funds. This fee covers operational and management costs as well as distributor commissions. However, several components within this structure do not scale with asset size.
Recent Regulatory Changes Impact Industry Economics
Sebi has implemented significant changes to the mutual fund cost structure in recent months. The regulator capped brokerage costs and restructured the total expense ratio framework, with new rules taking effect from April 1, 2026.
| Cost Component | Previous Rate | New Rate |
|---|---|---|
| Cash Market Brokerage | 12 basis points | 6 basis points |
| Derivatives Brokerage | 5 basis points | 2 basis points |
| Additional Exit Load Charge | 5 basis points | Removed |
Under the revised framework, the base expense ratio will exclude statutory levies such as securities transaction tax, commodities transaction tax, and goods and services tax. The total expense ratio will be disclosed as a combination of base expense ratio, brokerage, regulatory levies, and statutory charges to improve transparency.
Fixed Costs Burden Small Investments Disproportionately
The impact of fixed costs becomes most apparent in small-ticket investments. Asset management companies pay approximately ₹35.00 to KYC Registration Agencies for each new investor onboarded, regardless of the investment amount. Additionally, AMCs pay about ₹11.00 per ISIN per investor annually to depositories as custody charges.
For a ₹500.00 monthly systematic investment plan, an AMC earns roughly 0.30% annually on that investment, excluding distributor payouts and operating expenses—approximately ₹18.00 per year. At this rate, it takes nearly two years for the AMC to recover just the fixed KYC costs.
Industry Seeks Telescopic Cost Structure
The mutual fund industry has been engaging with service providers including KYC Registration Agencies and depositories to address this structural imbalance. Industry representatives argue that if expense ratios are telescopic in nature, the entire cost chain should follow a similar structure.
| Asset Size | Maximum Expense Ratio |
|---|---|
| Up to ₹500 crore | 2.10% |
| Over ₹50,000 crore | 0.95% |
The revised expense ratio rules are expected to benefit smaller schemes more than larger ones, as funds with lower assets under management typically charge higher expense ratios to offset the lack of scale. However, experts note that reductions in fixed costs may not necessarily be passed on to investors, similar to how tax cuts in other industries are sometimes absorbed by companies rather than benefiting end consumers.
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