Nevesh | August 6, 2026
SEBI’s revised expense ratio framework is beginning to reshape another corner of the mutual fund industry, this time affecting distributors rather than investors.
Since the new rules came into effect this financial year, commissions earned on equity mutual funds have come down across most categories. The reduction may look small on paper, measured in just a few basis points, but for distributors who rely on trail commissions over years, it can have a noticeable impact on earnings.
Industry data for the first quarter of FY27 shows that the average distributable Total Expense Ratio (TER) has declined across equity schemes. Mid-cap and small-cap funds have seen a reduction of nearly 3 basis points, flexi-cap funds over 2 basis points and large-cap funds more than 6 basis points.
For someone investing in mutual funds, these changes may barely register. For distributors, however, those few basis points often determine whether a business remains comfortably profitable or becomes much harder to sustain.
Why commissions have fallen
The change follows SEBI’s decision to replace the Total Expense Ratio with the Base Expense Ratio (BER).
Under the revised framework, statutory expenses such as GST, Securities Transaction Tax (STT), stamp duty, exchange charges and other regulatory levies are no longer included within the base expense ratio. Only the costs directly related to managing and operating the fund remain part of BER.
The intention is to give investors a clearer picture of what they are paying the fund house and what portion goes towards mandatory statutory charges.
For distributors, though, the revision has also reduced the expense pool from which commissions are paid.
The pressure now shifts to scale
Several distributors estimate that commissions have fallen by around 3 to 5 basis points, although the impact differs from one fund house to another.
For established firms with a large book of business, the decline is manageable. Their earnings are spread across thousands of investors and sizeable assets under management.
The picture is different for smaller and newer distributors.
Building a client base takes years. Lower commissions mean it now takes longer to recover those costs. That makes entering the business less attractive than it was a few years ago.
Many in the industry believe the only practical response will be to grow faster. Higher assets under management, more clients and better operational efficiency will become increasingly important as margins narrow.
A business that may become more concentrated
The new structure could also change the shape of the distribution industry.
Independent distributors with relatively small businesses may find it difficult to compete if revenues continue to shrink. Some could choose to join larger wealth management firms or national distribution networks instead of running their own practice.
Larger firms, on the other hand, are better placed to absorb lower commissions because they operate at greater scale.
The result may not be immediate, but the direction is becoming clearer. The industry is gradually rewarding size, efficiency and long-term client relationships over sheer product distribution.
What investors should know
For investors, the revised expense ratio framework does not change how mutual funds are managed or how returns are generated.
The biggest difference is in disclosure.
By separating statutory charges from fund management expenses, the revised framework makes it easier to understand where the money actually goes. Investors get a clearer break-up of costs instead of seeing everything grouped under a single expense ratio.
That is consistent with SEBI’s broader effort over the past several years to improve transparency across the mutual fund industry.
The Nevesh View Point
The new rules make mutual fund costs easier to understand, which is good news for investors. But every regulatory change has another side.
Distributors are now being asked to build larger businesses while earning less from each investment. Those with strong client relationships and the ability to scale are likely to adapt. Smaller players may find the journey much tougher.
For investors, this shouldn’t influence how a mutual fund is selected. Performance consistency, investment discipline and suitability for financial goals remain far more important than changes in distributor commissions.
The real story isn’t that commissions have fallen. It’s that the business of distributing mutual funds is becoming more demanding, more competitive and increasingly dependent on scale.
This article is based on publicly available information and industry reports. It is intended solely for news and informational purposes and should not be construed as investment advice.