Will SEBI’s brokerage cap finally lower your MF costs?

SEBI move to cap mutual fund brokerage at 2 bps for equity and 1 bp for derivatives will shift excess brokerage above these caps into the TER, so any higher rate directly squeezes the AMC’s fee pool within existing TER limits and not the investor beyond those caps. SEBI argues equity funds often pay more than arbitrage funds because brokerage sometimes bundles research, which should be paid through management fees, so this separation improves transparency and avoids double charging investors for research. Statutory levies like STT, GST and stamp duty, and exchange or regulatory fees, remain outside TER and will be charged on actuals, so changes in these statutory rates flow to investors without inflating AMC fees.

For a quick example, take a ₹1,000 crore fund with 2 percent TER cap where distributor commissions are ₹10 crore and AMC fees ₹10 crore; if annual turnover is ₹1,000 crore and brokerage paid is 12 bps or ₹1.2 crore, only 2 bps or ₹0.2 crore can stay outside TER, and the excess would now eat into the AMC’s fee share. If the AMC cannot negotiate and pays the same brokerage, the extra above the cap reduces what the AMC can charge, which nudges AMCs to bargain for lower institutional rates in a competitive broking market. Since SEBI also proposes clearer, upfront breakup of charges and performance-linked fee options, disclosure will improve and incentives may better align with investor outcomes over time.

This change likely benefits investors through lower transaction leakages and more honest TERs, because research will not be back-doored into brokerage that sits outside base TER. Brokerages that relied on higher institutional brokerage may face revenue pressure, so service models could shift towards unbundled research and sharper execution pricing for funds. AMCs with strong dealing desks and scale will probably extract lower rates, while smaller funds may gain as market rates converge closer to the new caps due to transparency and competition.