India’s Mutual Funds Rulebook Just Got Its First Rewrite in 30 Years. Here Is What Actually Changed

SYNOPSIS

On December 17, 2025, SEBI approved the SEBI (Mutual Funds) Regulations, 2026 notified January 16, 2026 and effective from April 1, 2026. This formally replaced a framework in place since 1996. The industry it now governs manages over ₹72 lakh crore (as on December 2025) in assets, with monthly SIP inflows touching ₹28,000 crore. These rules touch every rupee of it.

Most investors read one number on a mutual fund factsheet the expense ratio. For 30 years, that number hid more than it showed.

On December 17, 2025, SEBI approved the SEBI (Mutual Funds) Regulations, 2026 notified January 16, 2026 and effective from April 1, 2026. This formally replaced a framework in place since 1996. The industry it now governs manages over ₹72 lakh crore (as on December 2025) in assets, with monthly SIP inflows touching ₹28,000 crore. These rules touch every rupee of it.

The Expense Ratio Problem

Before April 2026, the Total Expense Ratio (TER) bundled everything into one number the fund manager's fee, brokerage, Securities Transaction Tax, Stamp Duty and GST. Two funds with identical management fees showed different TERs simply because one traded more. Comparing funds was at best approximate.

The 2026 regulations fix this. A new Base Expense Ratio (BER) now covers only what the AMC charges to manage the fund. Statutory levies STT, Stamp Duty, GST are charged on actuals outside the BER. Brokerage is separately capped: 6 basis points on cash market transactions (down from 12 bps) and 2 basis points on derivatives (down from 5 bps). The formula is now explicit: TER = BER + Brokerage + Regulatory Levies + Statutory Levies. For investors, this means for the first time you can see what you are paying a fund manager versus what you are paying the government. Those are very different things.

SEBI Caps Fund Overlap

India's thematic fund universe had a problem: funds with different names often held the same stocks. Because large-cap Indian companies span multiple sectors simultaneously, AMCs were effectively selling repackaged portfolios under different themes. SEBI's circular dated February 26, 2026 introduced a 50% portfolio overlap cap for sectoral and thematic funds from the same AMC. Schemes exceeding the limit have three years to comply or merge. Additionally, equity funds now require a minimum 80% equity allocation in several categories ensuring a fund labelled as equity actually behaves like one.

What Else Changed

Actively managed equity funds can now invest up to 35% of their residual allocation in gold, silver, InvITs, and REITs giving fund managers more tools beyond cash during equity downturns. The Solution-Oriented category (retirement and children's funds) has been replaced by Life Cycle Funds target-date structures where the equity-to-debt ratio automatically adjusts as the investor approaches their goal year. The fund manages the risk shift; the investor does not have to.

The Bottom Line

The 2026 regulations did not change the investment philosophy of Indian mutual funds. They changed the clarity with which that philosophy reaches the investor. The label must now match the portfolio. The cost must now be broken down. The number you see from April 2026 is not the same number you saw before even if the fund itself has not changed. Understanding that difference is the starting point for reading mutual fund disclosures correctly going forward.

Prateek Shukla