The mutual fund industry is expressing strong opposition to the government's proposed nominal merchant discount rate (MDR) on UPI transactions above certain thresholds. According to reports from The Hindu BusinessLine, mutual funds and online mutual fund distributors are seeking exemption from UPI-related charges, arguing that these fees would significantly impact their operational costs and profit margins. The government has assured that consumers will be exempt from these charges, but the industry remains concerned about the potential impact on their business models. This opposition is part of a broader industry trend where payment system designers are learning from India's experience with UPI, which expanded because the state treated low-cost digital payment as public infrastructure rather than imposing fees on merchants from the beginning.
The proposed MDR of 0.25-0.30 per cent could severely impact the profitability of online mutual fund distributors. As reported by The Hindu BusinessLine, app-based and platform-based MFDs typically operate on margins of around 0.75 per cent, and an MDR of 0.25-0.30 per cent could erode nearly a third of those margins. Industry experts warn that these charges are likely to be passed on to investors, potentially undermining efforts to bring new investors from smaller cities into the financial ecosystem. The financial impact is particularly severe for small traders who operate with thin margins after accounting for rent, electricity, staff costs, wastage, and informal credit, making the MDR equivalent to a margin tax rather than a convenience fee.
The proposed charges could significantly affect different investment segments within the mutual fund industry. According to VK Vijayakumar, Chief Investment Strategist at Geojit Investments, small SIPs are increasingly being made through UPI, and this segment accounts for around 45 per cent of new SIPs. For lump-sum mutual fund investments, UPI's share remains relatively low at about 10 per cent, but if the proposal is implemented, investors may shift from UPI-based transactions to traditional banking channels. The impact is particularly concerning for small traders who rely on digital payment systems for their daily cash cycles, as the current minimum 1 per cent MDR can be the difference between accepting digital payment and returning to cash-based transactions. As per Mint, if a hypothetical 0.5% MDR were charged on every UPI collection, a monthly SIP investor would pay ₹25 per instalment or ₹300 over 12 months, while a ₹1 lakh lump-sum investment would attract ₹500 at the same rate.
The financial impact varies significantly between different investment types and platforms. As reported by Feroze Azeez, Joint CEO of Anand Rathi Wealth, when an investor makes a ₹1 lakh investment through a direct platform using UPI, current charges include only stamp duty of 0.005 per cent (₹5 on a ₹1 lakh investment). However, at an MDR of 0.3 per cent, a ₹1 lakh investment would attract a cost of ₹300, compared with just ₹5 in stamp duty today. For SIP investors, the impact is likely to remain limited due to the relatively small transaction size of each instalment. The cost burden is particularly challenging for small traders who operate with tight daily cash cycles, where the MDR can effectively eliminate the convenience of digital payment systems. According to Mint, if the framework applies MDR to eligible merchant transactions above ₹2,000, a ₹2,001 payment could potentially fall into the chargeable category, depending on the final rules and merchant category.
The impact of UPI MDR will vary significantly across different investment platforms and intermediaries. As per Mint, if an AMC absorbs the charge, direct-plan investors may not see any additional cost, but the platform's margins would take the hit. If the charge is passed on as a convenience or payment fee, investors could face additional costs. For regular-plan investors, distributors already operate with commission and other operating costs, so the additional payment expense could affect their servicing economics. Industry experts suggest three possible outcomes: platform absorption of MDR (investors see no separate charge but platform margins suffer), direct pass-through (investors are charged transaction or convenience fees), or indirect recovery (platforms adjust other fees, reduce cashback or promotional benefits, or change pricing structures). According to Mint, the impact could differ across AMCs, brokers, distributors and wealth platforms because the entity processing or receiving the payment may initially bear the MDR, with investors not immediately seeing a separate charge but absorbing the cost across a large number of transactions.
