SEBI Regulations 2026: Understanding the New Base Expense Ratio (BER) and MF-Lite

SEBI Regulations 2026: Understanding the New Base Expense Ratio (BER) and MF-Lite

The landscape of the Indian mutual fund industry has undergone a monumental shift following the approval of the SEBI (Mutual Funds) Regulations, 2026. This regulatory overhaul, sanctioned by the Securities and Exchange Board of India in late 2025, represents the first comprehensive modernization of the framework since 1996. For nearly three decades, the industry operated under rules that, while robust for their time, struggled to keep pace with the rapid digitalization and the ballooning assets under management seen in the current era. The new regulations seek to address systemic inefficiencies and improve the net value delivered to the common investor by fundamentally rethinking how costs are calculated, disclosed, and capped. By moving away from an opaque bundling of expenses, the regulator has signaled its commitment to a lean, transparent, and highly competitive financial ecosystem that prioritizes the retail participant over the fund house's operational convenience.

At the heart of this transformation is a move toward extreme clarity. Historically, the Total Expense Ratio (TER) was a catch-all figure that combined investment management fees, administrative costs, and various government taxes. This bundling created a veil of complexity, making it difficult for even sophisticated investors to determine exactly how much they were paying for the fund manager's expertise versus how much was being absorbed by statutory requirements. The 2026 framework dismantles this structure, introducing a granular approach that separates the base cost of management from the inevitable costs of trading and taxation. This unbundling is not merely a bookkeeping change; it is a strategic maneuver designed to prevent Asset Management Companies from benefiting from the float on tax payments and to ensure that economies of scale are directly passed on to the unit holders who provide the capital.

As the industry transitions to this new paradigm, the focus shifts toward efficiency and transparency. The introduction of the Base Expense Ratio (BER) serves as the new benchmark for fund comparisons, allowing investors to see the true price of the service they are purchasing. Furthermore, the relaxation of entry barriers through the MF-Lite regime is expected to invite a wave of new players, particularly from the fintech sector, who can operate with lower overheads and pass those savings through to the market. This post explores the technical nuances of these regulations, the impact on different fund categories, and what the future holds for those looking to build wealth through index funds, exchange-traded funds, and actively managed schemes. Navigating these changes is essential for any modern investor seeking to optimize their portfolio for the long term.

Understanding the Base Expense Ratio (BER) Framework

Unbundling Costs for Greater Transparency

The transition from the old Total Expense Ratio (TER) to the newly minted Base Expense Ratio (BER) is perhaps the most visible change for the average investor. Under the 1996 regulations, the TER was a single percentage cap that included everything from the fund manager's salary to the GST paid on management fees. This bundled approach often allowed for a lack of precision, where AMCs could potentially absorb the variations in statutory levies within the overall cap. By unbundling these components, SEBI has ensured that the core operational fee—the BER—remains distinct from statutory and regulatory levies. This means that taxes such as GST, Securities Transaction Tax (STT), and stamp duty will now be charged on actuals, providing a much clearer picture of what the fund house is truly earning.

This structural change aims to eliminate any potential conflict of interest regarding the handling of tax-related expenses. In the past, if a fund house could reduce its internal operational costs, it might still charge the maximum allowable TER, effectively pocketing the difference. With the new 2026 framework, the BER is strictly defined as the fee for management and administration. Any statutory charges incurred during the execution of trades or for regulatory compliance are passed through at cost. This ensures that the net impact of government taxes is clearly visible to the investor and that the fund house does not profit from any discrepancies between estimated tax charges and actual tax outgo. Such transparency is a prerequisite for a mature financial market seeking global investment.

Furthermore, the formula for calculating the cost of an investment has been simplified to provide better comparative data across the industry. The Total Expense of a scheme will now be the sum of the BER, brokerage costs, regulatory levies, and statutory levies. This unbundled reporting requirement forces AMCs to disclose their efficiency in both fund management and trade execution. For instance, an investor can now compare two Nifty 50 index funds not just on a single percentage, but by looking at who has a lower base fee and who is more efficient with transaction-related brokerage. This granular detail empowers the retail investor to make more informed decisions based on the actual value-add of the asset management company rather than an opaque, aggregated figure.

Revised Limits and Impact on Returns

Along with the change in the naming convention from TER to BER, SEBI has simultaneously lowered the maximum allowable cost ceilings for several popular investment categories. The most notable reduction is seen in index funds and exchange-traded funds (ETFs), where the maximum BER has been capped at 0.90%, down from the previous 1.00% ceiling. While a ten-basis-point reduction might seem marginal to a casual observer, the compounding effect over a multi-decade investment horizon can result in significantly higher terminal wealth for the investor. These revised limits are a direct response to the global trend of cost compression in passive investing, ensuring that Indian products remain competitive with international benchmarks.

The impact of these revised limits extends beyond passive funds to various other scheme types, including fund-of-funds and close-ended equity schemes. For example, equity-oriented fund-of-funds have seen their maximum limits reduced from 2.25% to 2.10%, while close-ended equity schemes are now capped at 1.00%, down from 1.25%. These adjustments reflect the regulator's view that as the industry matures and assets under management grow, the operational costs per unit should naturally decline. By mandating these lower caps, the 2026 regulations ensure that the benefits of economies of scale are not retained as higher margins for the AMCs but are instead shared with the participants who fuel the market's growth.

From an investor’s perspective, these changes translate into improved net returns across the board. In a high-return environment, a small difference in expense ratios might be overlooked, but in periods of market consolidation or lower growth, every basis point saved contributes directly to the resilience of the portfolio. By tightening these limits, SEBI is effectively raising the bar for fund performance, as managers must now deliver superior alpha to justify their fees within a stricter cost envelope. This move towards a leaner cost structure is expected to drive further inflows into the mutual fund industry, as the value proposition for the retail investor becomes increasingly attractive relative to other traditional investment avenues like fixed deposits or real estate.

The MF-Lite Regime and Passive Fund Growth

Reducing Compliance for Passively Managed Schemes

One of the most innovative aspects of the 2026 regulations is the introduction of the MF-Lite framework. This regime is specifically designed for passively managed funds, such as index funds and ETFs, which do not require the same level of intensive research and active decision-making as their equity-oriented counterparts. Recognizing this fundamental difference, SEBI has dramatically reduced the compliance and regulatory burden for these schemes. By stripping away unnecessary red tape, the regulator aims to make it easier for specialized players to offer low-cost investment solutions to the public. This light-touch approach is expected to significantly reduce the operational overhead for fund houses focusing exclusively on tracking indices.

The MF-Lite regime streamlines several critical operational processes, including the fast-tracking of scheme information documents (SIDs). Under this framework, fund houses are no longer required to file separate key information memoranda (KIM) for every scheme, and the registration process for new entities has been simplified. These measures are intended to lower the barrier to entry for new entrants, fostering a more vibrant and diverse marketplace. By focusing on a subset of rules that are essential for investor protection while discarding those that only add complexity without adding value to passive management, the MF-Lite framework represents a modern, risk-based approach to financial regulation that is likely to be emulated in other sectors.

For the end investor, the reduction in compliance costs is expected to manifest as even lower expense ratios for passive products. When a fund house spends less on legal filings, compliance officers, and administrative hurdles, those savings can be reflected in a lower BER. This creates a virtuous cycle where lower costs attract more assets, which in turn allows for further cost reductions through scale. As passive investing gains traction in India—following the footsteps of more mature markets like the United States—the MF-Lite regime provides the necessary regulatory infrastructure to support this growth. It ensures that the plumbing of the financial system is efficient enough to support the massive volumes of capital now flowing into index-based strategies.

Encouraging New Players and Fintech Innovation

The launch of the MF-Lite framework is a clear signal that SEBI wants to encourage disruption in the asset management space. By relaxing the entry requirements, the regulator is opening the doors for fintech startups and technology-first companies to enter the mutual fund arena. These companies often bring a different perspective to the industry, focusing on user experience, digital distribution, and ultra-low-cost structures. The entry of such players is likely to force traditional fund houses to innovate and optimize their own operations to stay competitive. This influx of new capital and fresh ideas is vital for the long-term health and dynamism of the Indian capital markets.

Furthermore, the 2026 regulations allow private equity firms and other non-traditional entities to sponsor mutual funds under the MF-Lite umbrella, provided they meet certain net-worth and experience criteria. This expansion of the sponsor pool is intended to bring more professional capital and sophisticated risk management practices into the sector. With more players in the fray, the variety of passive products available to the retail investor is set to explode. We are already seeing the emergence of smart-beta funds, thematic ETFs, and debt-based index funds that provide specialized exposure at a fraction of the cost of traditional active funds. This diversification of product offerings is a direct result of a regulatory environment that rewards innovation.

Ultimately, the increased competition fostered by the MF-Lite regime serves the interest of the common investor. In a crowded market, the only way for a new player to gain traction is to offer a superior product at a lower price or with a better user interface. This competitive pressure keeps everyone on their toes and prevents complacency among the established giants. As the barriers between technology and finance continue to blur, the MF-Lite regime provides a safe and regulated playground for the next generation of financial products. Investors who are comfortable with digital platforms and seek low-cost, transparent exposure to the Nifty 50 or other broad-based indices will be the primary beneficiaries of this regulatory forward-thinking.

Broader Implications for the Indian Mutual Fund Industry

Rationalizing Brokerage and Transaction Costs

Beyond the headline expense ratios, the SEBI (Mutual Funds) Regulations, 2026, take a hard look at the hidden costs associated with trading. Every time a fund manager buys or sells a security, the scheme incurs brokerage costs, which are ultimately borne by the investor. Under the new rules, SEBI has significantly tightened the caps on these transaction costs. For equity cash market transactions, the limit has been reduced from 12 basis points to just 6 basis points. Similarly, the cap for derivative transactions has been lowered to 2 basis points. This move is aimed at curbing churn—the practice of excessive trading that generates high brokerage fees without necessarily improving fund performance.

By lowering these caps, the regulator is forcing fund houses to become more disciplined in their trading strategies. AMCs must now negotiate better rates with their brokers and ensure that every trade is executed with the best interests of the unit holder in mind. This rationalization of transaction costs is a critical component of the overall effort to improve net returns. For an actively managed fund with high turnover, these savings can add up to a substantial amount over the course of a year. It also removes the incentive for AMCs to use excessive trading as a way to indirectly compensate brokers who might also be providing distribution services, thereby cleaning up the industry's ethical landscape.

The new regulations also eliminate several miscellaneous allowances that previously bloated the expense structure. For instance, the additional 5-basis-point allowance that was linked to exit loads has been completely removed. This allowance was originally intended to help fund houses manage liquidity and redemption pressures, but SEBI has determined that modern risk management techniques make such extra cushions unnecessary. By removing these "add-ons," the regulator is ensuring that the BER truly represents the cost of doing business. This holistic approach to cost reduction—targeting both visible management fees and hidden transaction costs—creates a more honest and investor-centric financial product that can withstand the scrutiny of global investors.

Strengthening Governance and Skin in the Game

Transparency in costs is meaningless without robust governance to ensure that the money is being managed responsibly. The 2026 regulations introduce several measures to align the interests of fund management professionals with those of their investors. A key provision is the formalization of the skin in the game rule, which mandates that senior employees and fund managers of AMCs invest a portion of their compensation into the schemes they manage. This ensures that when an investor loses money, the fund manager feels the pinch as well. This alignment of interests is a powerful psychological tool that discourages excessive risk-taking and encourages a long-term, sustainable approach to wealth creation.

In addition to financial alignment, the new framework significantly reduces the complexity of the regulations themselves. The size of the mutual fund regulations has been slashed by nearly 44%, from 162 pages to just 88. This simplification is not just about brevity; it is about making the rules easier to understand and follow. By eliminating redundant provisos and convoluted clauses, SEBI has made it harder for entities to find loopholes that might disadvantage the retail investor. A clearer rulebook leads to better compliance, more effective oversight by trustees, and ultimately, a safer investment environment for everyone involved. This focus on regulatory clarity reflects a maturing financial ecosystem that values substance over form.

Finally, the 2026 framework emphasizes the role of independent trustees in safeguarding investor interests. With the unbundling of the BER and the tightening of brokerage caps, trustees now have a clearer mandate to monitor expenses and challenge any deviations from the spirit of the regulations. They are expected to scrutinize the value delivered by the AMC in exchange for the management fees charged. This heightened level of accountability, combined with the structural changes in cost disclosure, ensures that the Indian mutual fund industry remains one of the most well-regulated and investor-friendly markets in the world. As we look toward the future, these governance reforms will be the bedrock upon which the next decade of wealth creation is built.

In conclusion, the SEBI (Mutual Funds) Regulations, 2026, represent a watershed moment for the Indian financial sector. By introducing the Base Expense Ratio and the MF-Lite framework, the regulator has not only lowered costs but has also redefined the standard for transparency. Investors now have a clearer view of the road ahead, with fewer hidden hurdles and a more direct path to market returns. The shift from a bundled, opaque system to a granular, unbundled one is a clear victory for the retail participant. While the industry may face a period of adjustment as it aligns with these leaner norms, the long-term benefits of increased competition, higher net returns, and improved governance are undeniable. As the industry continues to evolve, staying informed about these regulatory shifts will be the key to making the most of the opportunities that the Indian market has to offer.