What happened
The Securities and Exchange Board of India notified the SEBI (Mutual Funds) Regulations, 2026 on 14 January 2026, replacing the 1996 framework that had governed Indian mutual funds for 30 years. The new rules came into effect on 1 April 2026, along with an updated Master Circular. A further amendment was published in July 2026. The most consequential change for retail investors is how fund costs are now calculated and disclosed. SEBI restructured the Total Expense Ratio as the sum of a Base Expense Ratio, permitted brokerage, and applicable regulatory levies — separating these components to make costs more transparent. For index funds and exchange-traded funds, the Base Expense Ratio ceiling was lowered from 1.00% (which previously included levies) to 0.90% (excluding levies). For actively managed open-ended equity-oriented schemes managing up to ₹500 crore in daily net assets, the ceiling is 2.10% excluding levies, stepping down as assets grow larger. Initial issue expenses — costs incurred when a fund house launches a new scheme — must now be borne by the asset management company, its trustees, or sponsor, rather than charged to the scheme and thereby passed on to investors. Brokerage caps were also tightened: the ceiling for cash market trades fell from 12 basis points (including levies) to 6 basis points (excluding levies), and the derivatives ceiling fell from 5 basis points to 2 basis points.
Why this matters
Expense ratios directly erode the returns that reach your account. A difference of even 0.25% in annual charges, compounded over 20 years on a monthly SIP of ₹10,000, can translate into a gap of ₹1 lakh or more in the final corpus — a significant amount for a middle-income investor saving for retirement or a child's education. The reduction in brokerage caps means fund managers pay less when buying and selling securities in the portfolio, which should benefit long-term unitholders through marginally better net asset values over time. The governance overhaul is equally important for investor confidence. Trustees are now formally required to oversee AMC operations, risk management, and compliance, rather than serving in a largely ceremonial role. AMC boards carry explicit responsibility for day-to-day compliance. The shift to digital monitoring of fund advertisements and away from some newspaper-based disclosures also reflects how the regulator views the industry's modern investor base. For investors in regular plans, the new framework does not eliminate the distributor commission, but it operates within a stricter cost ceiling that leaves less room for excessive intermediation charges.
Action plan
Ask your mutual fund distributor or online investment platform to show you the Base Expense Ratio of each scheme you hold, and compare it against the new ceilings to confirm your fund house has complied.
If you hold index funds or ETFs, verify that the TER has been updated to reflect the new 0.90% Base Expense Ratio ceiling. Lower-cost passive funds remain the most efficient starting point for long-term wealth building.
Consider switching from a regular plan to a direct plan if you manage your own investment research and do not require distributor advice — direct plans exclude distributor commissions and now operate under the same tighter cost structure.
For any mutual fund scheme launched after 1 April 2026, check the Scheme Information Document to confirm that initial issue expenses are not being charged to the scheme's NAV, as this is explicitly prohibited under the new rules.
Read the annual trustee report for your fund house, which should now provide more detailed information about how risks and costs are managed, reflecting the enhanced oversight requirements.
Bottom line
SEBI's 2026 mutual fund regulations are the most significant update to India's fund industry framework in three decades, and the changes broadly favour the long-term retail investor through lower costs and stronger governance. The new rules are already live, so investors should check their portfolios now rather than waiting to see whether fund houses have passed on the benefits.
Sources: SEBI (sebi.gov.in), Wright Research, Mondaq, CorpLaw Updates, Equitymaster.