Brokerage and transaction cost allowance

Buying and selling securities costs money — brokerage, and the cost of actually executing the trade. SEBI lets a scheme charge this separately from its base expense ratio, up to a limit.

Think of it as two buckets. The base expense limit is one bucket, capped by the slabs. Brokerage and transaction cost is a second, smaller bucket, capped on its own terms. Both are charged to the scheme, so investors bear both — but the second bucket does not eat into the first, and the first does not have to make room for it.

The real question is what happens when a scheme trades more than the second bucket can hold. The broker still has to be paid, but the extra cannot be passed to investors. Under the 2026 framework, spending above the limits the regulations set is borne by the AMC, the trustees or the sponsors. So the base expense limit is not squeezed, and the NAV is not touched. Heavy trading eats into the AMC's own money instead.

The allowance, on top of the base expense limit (Chapter 7):

• Cash market transactions: up to 0.06% of trade value
• Derivatives transactions: up to 0.02% of trade value

These percentages apply to the value of each trade executed, not to the scheme's net assets — so the rupee cost this allowance can absorb depends entirely on how much the scheme actually turns over, not on how big it is. A scheme that trades rarely uses almost none of this allowance; a scheme with a high Portfolio Turnover Ratio uses much more of it.

Only four things may ever be charged to investors in total: the base expense ratio, this brokerage/transaction cost allowance, statutory levies including GST, and exit load. Nothing else is permitted.

That closed list is what settles the excess. Brokerage is chargeable only up to 0.06%/0.02% of trade value, and the total charged to investors is defined as the base limit plus brokerage plus transaction cost plus statutory levies — so a rupee of brokerage above the cap has nowhere to sit inside the scheme. The workbook states the consequence directly: "Any expenditure in excess of the base limits specified in these regulations shall be borne by the asset management company or the trustees or sponsors."

Take a cash-market equity scheme with Rs 4,000 crore of net assets that executes Rs 3,200 crore of purchase and sale trades in a year — a portfolio turnover ratio of 0.8. The net assets, the trade value and the brokerage bill are illustrative; only the 0.06% and 0.02% caps come from the workbook.

The chargeable ceiling is 0.06% of trade value: 0.06% × Rs 3,200 crore = Rs 1.92 crore. On this scheme that works out to 1.92 ÷ 4,000 = 0.048% of net assets — but note that the 0.048% is a result, not a limit, because the cap was applied to turnover.

Now suppose the actual brokerage bill for the year is Rs 2.10 crore, which is Rs 0.18 crore more than the allowance can hold. The split is:

• Charged to the scheme: Rs 1.92 crore. The full allowance, on top of the base expense limit.
• Borne by the AMC, trustees or sponsors: Rs 0.18 crore. The excess never reaches investors.
• Base expense limit headroom: unchanged. The slab ceiling for the AMC's own fee is exactly what it was before the scheme traded heavily.

So the excess does not disappear, and it does not come back as a squeeze on the base expense ratio either — it simply stops being the investor's cost. If the same scheme also traded derivatives, that leg would be measured separately at 0.02% of its own trade value: Rs 500 crore of derivative trades would add Rs 0.10 crore of chargeable cost, tracked apart from the cash-market figure rather than pooled with it.

Chapter 7 (Net Asset Value, Total Expense Ratio and Pricing of Units) gives the 0.06%/0.02% figures, lists the only charges that may reach investors, and states that expenditure above the limits in the regulations is borne by the AMC, the trustees or the sponsors. Expect a computation question — trade value times the percentage — and a conceptual one on who pays for brokerage spent above the cap.

• 0.06% and 0.02% are on trade value, not net assets. A scheme with heavy turnover can use up this allowance fast even if it is not a large scheme.
• Do not answer that the excess is charged to the scheme. Brokerage above the cap is not chargeable to investors at all, and it does not fold back into the base expense limit — it is borne by the AMC, the trustees or the sponsors.
• Cash and derivatives have different caps. A scheme trading both must track them separately.
• This allowance is not automatic profit for the AMC — it strictly reimburses execution cost, and only up to the percentage of trade value stated.