Total Expense Ratio (TER)

What you actually pay to own a fund

When you buy a mutual fund, you never write a separate cheque for fees. Instead, the fund house deducts its costs — management fees, distributor commissions, registrar charges, audit and marketing expenses — directly from the scheme's assets every day. The annualised total of these costs, divided by the fund's average assets, is the Total Expense Ratio, quoted as a percentage. A 1.5% TER on a ₹1 lakh investment quietly costs you about ₹1,500 a year, netted out of your returns before the NAV is ever published.

Because the charge is invisible, TER is one of the most important numbers a retail investor can check. Over decades of compounding, even a half-percent difference can erode a meaningful slice of final wealth.

SEBI's sliding scale

SEBI caps TER on a tiered basis: the larger a scheme's assets under management, the lower its maximum permitted ratio. The logic is economies of scale — running a ₹10,000 crore fund does not cost ten times as much as a ₹1,000 crore one, so investors in big funds should pay proportionately less. Index funds and ETFs, which require little active management, face far tighter ceilings than actively managed equity schemes.

The regime is being tightened further. In December 2025 SEBI approved an overhaul, effective April 1, 2026, that lowers the maximum ratios across AUM slabs — cuts of up to 15 basis points, with most slabs trimmed by around 10 basis points. The highest cap for open-ended equity schemes under ₹500 crore, for instance, falls from 2.25% to 2.10%.

Base Expense Ratio and the fine print

The new framework also redefines the headline number as the Base Expense Ratio, which excludes statutory levies such as GST, stamp duty, SEBI fees and exchange charges. Those pass-through costs sit on top, so investors should read the scheme document carefully.

The practical takeaway is unchanged: always compare the direct plan TER, which strips out distributor commissions, against the regular plan. Choosing direct plans and lower-cost index funds is one of the few free levers a long-term investor controls.