The mutual fund industry is compiling an extensive dataset on portfolio churn and transaction costs to help the Securities and Exchange Board of India (Sebi) evaluate its proposal to sharply cap brokerage fees.
According to three people aware of the matter, the Association of Mutual Funds in India (Amfi) has asked fund houses to submit turnover data which will help assess the brokerage and transaction costs incurred while executing trades. The consolidated information will be sent to Sebi, which wants to determine how significant brokerage expenses are for funds before finalising the proposed caps.
Sebi on 28 October proposed slashing brokerage paid by mutual funds from 12 basis points (bps) to 2 bps in the cash market, and from 5 bps to 1 bps for derivatives. The move is aimed at preventing investors from effectively paying twice for research-first through brokerages, and again through the asset management company’s own research.
“We have received a request from Amfi to submit turnover data for equity and derivatives separately,” said an official with an asset management company (AMC). “They (Amfi) further plans to send this to Sebi (Securities and Exchange Board of India),” the official added.
Turnover in equities and derivatives indicates how frequently a fund enters and exits positions, and is a direct reflection of portfolio churn. Higher turnover implies more active trading and more brokerage outgo, making it a practical indicator of overall trading costs.
Another official said Amfi would analyse the data to determine how much mutual funds actually spend on transactions. This, the official said, will influence Sebi’s proposed cap on costs. The data collection has been underway for over two weeks, with fund houses being asked to submit their transaction spend for the past ten years, the official added.
Sebi has also extended the deadline for submitting responses to the circular to 24 November, from the earlier 17 November.
Currently, AMCs disclose their total expense ratio and additional costs bi-annually on their websites, with links also sent to investors. Amfi has now asked fund houses to compile a decade-long dataset of total transaction costs incurred on buying and selling shares to assess feasibility.
For context, the largest schemes of the two biggest AMCs-SBI Nifty 50 ETF and HDFC Balanced Advantage Fund-reported brokerage and transaction expenses of ₹74 crore and ₹43 crore, respectively, in FY25, according to their annual report disclosures.
Emails sent to Amfi and Sebi remained unanswered till press time.
The regulator’s proposals have created uncertainty across the mutual fund ecosystem. New caps on brokerages could dampen revenues for brokers, AMCs and distributors. If implemented, AMCs would have to absorb their own research costs instead of passing them on to investors, potentially raising operating expenses and squeezing margins.
Platforms that offer both execution and research services may also see lower revenues as AMCs reduce spending on paid research.
“We expect the AMCs to pass on a part of the impact (of the reduced TER) which will impact the revenue streams of institutional equities,” JM Financial had said in a report dated 29 October.
A report by Nomura Financial Advisory and Securities (India) Pvt. Ltd dated 30 October had said that a reduction in the cap of brokerage charges may not immediately affect AMCs, as they could pass on lower brokerage or rationalise their broker network. The report added that these changes would make active fund management costlier and push AMCs towards passive products.
Sebi’s consultation paper also proposes scrapping an additional 5 bps charge that AMCs currently earn over the exit load, a fee levied on investors who exit a scheme prematurely.