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SEBI Floats Proposal For Performance-Based Mutual Fund Fees: A Fairer Model Or A Risky Shift?
SEBI Floats Proposal For Performance-Based Mutual Fund Fees: A Fairer Model Or A Risky Shift?
The Sebi (Securities and Exchange Board of India) in its latest consultation paper on reviewing the SEBI (Mutual Funds) Regulations, 1996 has proposed an optional performance-linked Total Expense Ratio (TER) — a model where fund fees rise or fall depending on how well a scheme performs – for Asset Management Companies (AMCs).
SEBI pitched that this new provision “shall be voluntary for AMCs," meaning fund houses can choose whether to adopt it.
TER is the total annual cost charged to investors in a mutual fund scheme. It includes management fees, operational expenses, marketing, registrar fees, and more — expressed as a percentage of the scheme's AUM (Assets Under Management).
Ajay Kumar Yadav, CFPCM, Group CEO & CIO at Wise Finserv told News18.com that the idea marks a significant change in the current fee structure. Today, mutual funds charge a fixed TER regardless of performance. “Investors pay the same fee whether the fund beats or trails its benchmark," he said. Under SEBI's model, funds that outperform their benchmark or meet a specific hurdle rate will be allowed to charge slightly higher fees, while weaker performers will have to charge less.
Yadav called the model “a step in the right direction" because it aligns fund manager incentives with investor outcomes. However, he also warned that implementing it may be difficult. Variable daily fees can complicate NAV calculations, especially for open-ended funds where money flows in and out every day. He added that the model might work more smoothly in closed-ended funds or PMS-type structures, where performance is measured over a fixed period.
A key concern is whether such a system may push fund managers to take more risks. Yadav said this risk is real. “If fees depend on beating the benchmark, managers might chase high-return sectors or move away from the scheme's stated strategy just to stay ahead," he explained. To avoid this, he believes SEBI should rely on risk-adjusted and rolling performance, not short-term gains or one-off rallies.
For the model to work, transparency and strict governance will be essential. Yadav highlighted the possibility of misuse — from changing benchmarks to loosely interpreting performance triggers. He said SEBI would need clear rules, full public disclosure of performance-linked fee triggers, and periodic independent audits. “Investors must be able to see, in plain language, how and why their fund paid variable fees," he said.
Dhirendra Kumar, CEO of Value Research, told The Economic Times that the challenge has never been the intention behind such reforms, but their execution. He explained that the real hurdle lies in benchmarking and calculating a daily NAV that adjusts for variable expenses. According to him, the model may work for closed-end funds, where investor money remains locked in and performance can be evaluated over a fixed period before settling fees. “The intent is good, but the open-ended fund structure makes it unworkable," Kumar added.
Disclaimer: The views and investment tips by experts in this News18.com report are their own and not those of the website or its management. Users are advised to check with certified experts before taking any investment decisions.
Source: News18
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