Essential Insights for Mutual Fund Investors

To improve investor protection, increase transparency, and lower the cost of mutual fund investments, the Securities and Exchange Board of India (SEBI) proposed a number of regulatory changes in 2025. While some of these modifications are suggestions presently for comment, others have already been finalised through circulars.

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A look at the biggest mutual fund rule changes of 2025

1. New “MF-Lite” regime for passive funds

Effective March 16, 2025, SEBI introduced the “MF-Lite” framework to relax certain compliance requirements for passively managed schemes, such as specific Index Funds, Exchange Traded Funds (ETFs), and passive Funds of Funds (FoFs).

2. Cut off timings

The following cut-off timings shall be observed by AMCs with respect to repurchase of units in liquid fund & overnight fund schemes and plans, and the following NAVs shall be applied for such repurchase:

a. Where the application is received up to 3.00 pm – the closing NAV of the day immediately preceding the next business day; and

b. Where the application is received after 3.00 pm – the closing NAV of the next business day.

Provided that in case an application is received through online mode, the cut-off time of 7 PM shall be applicable for overnight fund schemes.

“Business Day” does not include a day on which the Money Markets are closed or otherwise not accessible.

This was effective June 1, 2025.

3. Rules for passive breaches

Mutual funds sometimes breach their prescribed asset allocation limits not because of mistakes by the fund manager, but due to market events, like a sudden price change, corporate actions, or large redemptions.

This circular sets clear timelines for rebalancing portfolios in such cases, reducing prolonged exposure to unintended risks.

4. Reduced exit load cap

SEBI lowered the maximum permissible exit load from 5% to 3%. The decision was taken in a September SEBI board meeting chaired by Chairman Tuhin Kanta Pandey. The market regulator noted that most schemes currently charge between 1% and 2% as exit load.

“As a part of review of the various practices followed in the industry relating to the expenses being charged by MFs and also considering the observations of onsite and offsite SEBI inspections of Mutual Funds, a need was felt to further
streamline the following regulatory provision – Reduce the maximum permissible exit load from 5% to 2%,” Sebi said.

5. Use of liquid / overnight funds for IA & RA deposits

SEBI now allows Investment Advisers (IAs) and Research Analysts (RAs) to comply with the mandatory deposit requirement by keeping their deposits in liquid or overnight mutual funds instead of a bank. These funds are very safe and low-risk, ensuring the deposit money remains secure. This came into effect on 30 September 2025

6. Reclassification of REITs for MF Investments

SEBI has decided that from January 1, 2026, investments by mutual funds (and specialised investment funds) in Real Estate Investment Trusts (REITs) will be treated as equity-related instruments.

Existing REIT holdings by debt-scheme MFs as of December 31, 2025 will be “grandfathered” (i.e. not reclassified), but going forward, debt schemes may have to adjust portfolios if they hold REITs.

1. Lower total expense ratio (TER)

SEBI has proposed reducing TER across mutual fund schemes to make investing cheaper

2. Closed-ended fund TER revision

3. Index Funds & ETFs TER reduction

TER cut from 1.00% → 0.85%, making passive investing more cost-efficient

4. Fund-of-Funds (FoFs) TER reduction

FoFs investing ≥65% in equity schemes: 2.25% → 2.10%

Other FoFs: 2.00% → 1.85%

5. Asset-based TER slabs revision

TER on the first ₹500 crore of assets:

Higher AUM slabs also see reductions between 0.05%–0.15%, lowering costs for large funds

6. Brokerage cost reduction

Mutual funds will pay less brokerage from investors’ money, saving costs

7. Statutory levies separated from TER

GST, STT, CTT, and stamp duty will now be charged separately, improving transparency and avoiding hidden charges

8. Removal of extra 5 bps charge

Earlier allowed additional 5 bps for exit-load schemes will be removed, further reducing costs for investors

9. No double-charging for research

SEBI clarifies that research costs cannot be charged twice (via management fees and brokerage), protecting investors from hidden costs

10. AMC to bear marketing & fund launch costs

Fund houses must bear these costs themselves, avoiding unnecessary expenses for investors

11. Performance-linked expense ratios (optional)

AMCs may charge higher TER only if funds deliver above-benchmark returns

This makes expenses more aligned with fund performance, benefiting investors

In order to make investing in mutual funds more affordable, secure, and transparent for investors, SEBI implemented a number of significant improvements in 2025. When taken as a whole, these changes increase investor confidence in India’s capital markets by making mutual fund investing more affordable, equitable, and investor-friendly.

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Disclaimer: This article is written purely for informational purposes and should not be considered investment advice from Upstox. Investors should do their own research or consult a registered financial advisor before making investment decisions.

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