The Securities and Exchange Board of India (SEBI) has recently introduced major changes in mutual fund rules. These updates come after nearly 30 years and aim to improve transparency and simplify regulations.
However, many misleading claims are circulating, especially about cost reduction. Here’s a clear and simple breakdown of what has actually changed and what it means for investors.
TER Replaced by BER: What It Really Means
One of the biggest changes is that the Total Expense Ratio (TER) system has been replaced by the Base Expense Ratio (BER).
Many reports suggest that this change will significantly reduce costs. But according to research reports, the reality is more modest.
For most active equity funds, investors may only see savings of around 5 to 7 basis points annually, not the widely claimed 15 basis points. For example, on an investment of ₹10 lakh, the actual savings may be around ₹600 per year.
Another change is that expenses will now be shown in separate categories instead of a single line. This improves clarity, but does not dramatically reduce costs.
Key changes under this update include:
The old 162-page rulebook has been reduced to 88 pages
Expense reporting is now split into multiple segments
Extra 5 basis points allowed for exit load schemes has been removed
Cash-market brokerage reduced from 12 bps to 6 bps
Derivative brokerage reduced from 5 bps to 2 bps
Overall, the cost benefit exists, but it is limited rather than major.
Big Structural Change: Restrictions on Fund Overlap
One of the most important reforms is the restriction on portfolio overlap between similar funds.
Earlier, many thematic and sectoral funds—such as technology, digital, or innovation funds—often held the same major stocks. This created a false sense of diversification for investors.
Now SEBI has set a rule that no thematic or sectoral fund can have more than 50% overlap with another similar fund.
This change will reduce duplication and force fund houses to maintain more distinct portfolios, improving real diversification.
Introduction of Life Cycle (Target Date) Funds
SEBI has also introduced a new category called Life Cycle Funds (Target Date Funds), launched in early 2026.
These funds are designed for long-term goals like retirement. For example, a “2050 Retirement Fund” will initially invest more in equities and gradually shift towards debt as the target year approaches.
Who can benefit:
Investors who do not want to rebalance portfolios frequently
Long-term investors with retirement goals
Points of caution:
Experts suggest that in some cases, a simple 70:30 equity-debt hybrid strategy may still be cheaper and more efficient than these structured funds.
What Has Not Changed
Despite the updates, several key things remain the same:
SIP investments will continue as usual
Existing mutual fund folios remain unaffected
Taxation rules are unchanged
Cut-off timings for transactions remain the same
What Investors Should Do Now
Investors should take this opportunity to review their mutual fund holdings carefully. Checking fund factsheets can help you understand whether your funds are truly diversified or overlapping heavily.
From August 2026, overlap reports will be made available. This will help investors identify duplicate holdings and simplify their portfolios.
Also, be cautious with complex share classes that come with performance-linked structures like hurdle rates or high-water marks. If you do not fully understand them, it may be better to avoid them.
