Have SEBI Mutual Fund Expense Ratio and Distributor Commission Regulations had the Intended Impacts?

SEBI’s regulatory approach to reduce expense ratios of Mutual Fundsi has been a concerted one that spans across a two-decade long timeline.  

Some of the major changes included a partial ban on upfront commission and then a complete ban on the same, introducing longer trail commissions, caps on Total Expense Ratios (TER), slab changes to the TER structures to reflect newer scheme sizes and other market-related conditions, enhanced disclosure requirements on TERs, among others.  

Further, SEBI released two consultation papers on the subject, the second one as recent as October 2025ii. 

The objectives for many of these changes relates to improving investing behaviours towards longer term holding, improving the expense management of Asset Management Companies (AMC) and reducing churn driven investments to capture higher commissions, and via these effects, ensuring that a greater proportion of investor monies go into the invested corpuses and they can benefit from economies of scale. 

How might we go about assessing the effectiveness of these regulations? 

One approach is to look at the effect of TER on fund performance. The main variable affected by the TER, from an investor’s point of view, is the Net Returns. However, the Net Returns also depend on a number of other factors like fund performance, type of fund, economic situation and investment horizons, among other things. Studies analysing the relationship between expense ratio and fund performance show inconsistent findingsiii. Additionally, a study by SEBI found that the brokerage and transaction costs of some MF schemes is more than even the maximum TER limits prescribediv. Thus, a purely empirical analysis to determine the effect of TER on fund performance, and hence investor returns may be challenging and needs careful design.  

Another approach would be to study the impact of commission structures on investor behaviour and returns. Apart from TER, the commission structure of MF distributors (MFD) can also play a significant role in investor behaviour and returns. For instance, there is some evidence that capping/banning of upfront commissions for mutual funds had a negative impact on the flow of funds to MF schemesv. However, along with upfront commissions, trail commissions can also impact investor persistency and influence MFD behaviour. There is an implicit understanding in the insurance industry that trail commissions can influence the persistency of life insurance policiesvi. It can be reasonably expected that a similar paradigm exists in the MF industry as well. However, trail commissions and persistency rates are not available publicly for MF schemes. With appropriate availability of data, it is possible to validate/answer the following questions/hypotheses -  

Answers to these questions will not only help better understand the impact of SEBI regulations but also help fine tune them appropriately, driven by data-based insights. 

Below is a quick snapshot of some of the past regulatory changes in this regard: