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SEBI proposes an optional performance-linked TER for mutual funds, letting AMCs adjust fees based on scheme performance.
SEBI Proposes Voluntary Performance-Linked TER for AMCs
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).
According to Ajay Kumar Yadav, CFPCM, Group CEO & CIO at Wise Finserv, 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.
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Varun Yadav is a Sub Editor at News18 Business Digital. He writes articles on markets, personal finance, technology, and more. He completed his post-graduation diploma in English Journalism from the Indian Inst…Read More
Varun Yadav is a Sub Editor at News18 Business Digital. He writes articles on markets, personal finance, technology, and more. He completed his post-graduation diploma in English Journalism from the Indian Inst… Read More
November 13, 2025, 17:09 IST
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