The Securities and Exchange Board of India (Sebi) is facing resistance from the mutual fund industry over its recent proposal to introduce performance-linked fees. The regulator's plan, announced on 28 October 2025, aims to overhaul sector regulations by requiring funds to charge a variable expense ratio based on a scheme's performance. However, asset management companies (AMCs) are highlighting significant operational and conceptual hurdles in implementing such a system.
Core Concerns: Complexity and Fairness
According to six sources familiar with the matter, several fund houses have individually submitted feedback to Sebi, detailing the difficulties in calculating a performance fee. A unified discussion at the Association of Mutual Funds in India (AMFI) level is still pending. The primary issue stems from the open-ended nature of mutual funds, where investors join and exit at different times and prices.
Deepak Shenoy, CEO of Capitalmind Mutual Fund, pointed out that investors would struggle to estimate fees in advance due to a complex accounting mechanism. The fundamental challenge is that two investors in the same scheme can have vastly different returns based on their entry and exit points, making it unfair to apply a single performance-based fee to all.
Operational Hurdles and Revenue Uncertainty
Fund managers warn that the proposal could lead to revenue instability for AMCs, especially during market downturns. Jimmy Patel, Managing Director of Quantum Mutual Fund, noted that in a sharp market decline, funds might fail to cover basic management costs if performance fees are not earned. He emphasized that for such a model to succeed, AMCs would need clear benchmarks, robust investment processes, and sufficient portfolio liquidity to consistently generate alpha.
An anonymous AMC official raised critical questions about defining performance itself. Should it be judged over one, three, or five years? Should the measurement use rolling returns or point-to-point returns? The lack of clarity on these parameters creates regulatory uncertainty.
Sebi's Intent and Existing Models
Despite the pushback, Sebi is keen on implementing the proposal to benefit investors. A person privy to the regulator's discussions stated that the goal is to help investors differentiate between schemes and funds, moving away from the current landscape of similar offerings. The model Sebi has in mind is similar to the performance fee structure prevalent in Portfolio Management Services (PMS) and Alternative Investment Funds (AIFs).
In AIFs, for instance, a hurdle rate is set. Performance fees are charged only on returns earned above this rate, with a typical profit-sharing arrangement of 80:20 between the investor and the fund manager. However, as Pramod Gubbi, co-founder of Marcellus Investment Managers, explained, applying this to mutual funds is complex due to the sheer volume of daily entries and exits, unlike AIFs which have specific monthly or quarterly valuation dates.
Gubbi added that while technology could potentially solve these computational challenges, the industry remains cautious. The draft Sebi paper states that the performance-based expense ratio would be voluntary, with a detailed framework to be finalized after stakeholder consultation. Emailed queries to Sebi and AMFI remained unanswered at the time of reporting.
