At the Moneycontrol Mutual Fund Summit 2026 held in Mumbai on 30 June, Securities and Exchange Board of India Executive Director Manoj Kumar highlighted an interesting development for the mutual fund industry. According to reports from Mint, Kumar said SEBI has created an enabling provision for fund houses to adopt a performance-based fee structure, but surprisingly, the industry has shown very little interest in it so far. "We have created an enabling provision for a performance-based incentive structure. Mutual funds are governed by Total Expense Ratio (TER) limits, but we have included an enabling clause that allows you to earn if you perform. However, neither the industry nor other stakeholders have spoken much about it," he stated.
As reported by Mint, Shweta Rajani, Head of Mutual Funds at Anand Rathi Wealth, explained that SEBI's consultation paper released in October 2025 proposed an optional framework allowing mutual funds to introduce performance-linked fees alongside the existing expense structure. Unlike the current total expense ratio (TER), where investors pay a fixed fee irrespective of how the fund performs, this model allows a part of the fee to vary based on the scheme's performance. Nitin Agrawal, CEO of Mutual Funds by InCred Money, outlined that the framework rests on four pillars: a hurdle rate (minimum return required before any performance fee), high-water mark (prevents charging fees twice on same gains), catch-up provision (allows managers to earn fees on full return after clearing hurdle), and symmetry (protects investors during underperformance).
According to Mint reports, Rajani noted that from a retail investor's perspective, the biggest advantage is encouraging fund houses to focus on generating consistent long-term outperformance rather than simply growing assets under management. Agrawal believes it could lower fixed costs if designed well, stating "The manager only earns more if the investor genuinely earns more (above the hurdle)." However, both experts caution significant implementation challenges. Rajani highlighted that calculating performance-linked fees fairly is operationally challenging and can create different outcomes for investors entering at different points in time. Agrawal added that India's mutual fund industry is still overwhelmingly distributor-led, making a flat, predictable TER easier to sell through the distribution channel than a variable fee structure.
As reported by Mint, experts agree that any performance fee should reward genuine alpha rather than absolute returns and should be assessed over longer periods. Rajani emphasized that the fee should be linked to benchmark relative performance rather than absolute returns and performance should be assessed over rolling multi-year periods instead of a single year. On the charging mechanism, she noted that charging at the investor level would be operationally difficult given daily inflows and outflows in open-ended mutual funds, while charging at the scheme level could create fairness concerns. Agrawal favors a hybrid approach where scheme-level NAV crossing the high-water mark determines whether fees can be charged at all, combined with pro-rata application based on each investor's holding period.
