Market Basics · Chapter 3 / 36
Expense Ratio (TER) — SEBI caps and what you pay
A small annual percentage deducted from NAV. Looks tiny, compounds dramatically.
The Total Expense Ratio (TER) is the annual fee a mutual fund charges, expressed as a percentage of the fund's average AUM. It covers fund management, distribution, custodian fees, audit, marketing, and statutory levies.
Where it's charged
TER is deducted continuously from the fund's NAV. You never see a separate "fee invoice" — the NAV you see is already net of all expenses. Over a year, the NAV would have been ~1-2% higher (for an equity fund) without the TER drag.
SEBI's slab structure
SEBI caps TER on a sliding scale that shrinks as AUM grows:
| AUM slab | Equity TER cap | Debt TER cap |
|---|---|---|
| First ₹500 cr | 2.25% | 2.00% |
| Next ₹250 cr | 2.00% | 1.75% |
| Next ₹1,250 cr | 1.75% | 1.50% |
| Next ₹3,000 cr | 1.60% | 1.35% |
| Next ₹5,000 cr | 1.50% | 1.25% |
| Above ₹50,000 cr | 1.05% | 0.80% |
Index funds and ETFs have separate, lower caps (typically 1.00% and 1.00% respectively, with some being 0.10-0.30% in practice).
Direct vs Regular plans
Every fund has two plans:
- Regular plan: includes a distribution / commission cost paid to the intermediary (broker, advisor). Higher TER.
- Direct plan: no distributor commission. Lower TER, typically by 0.5-1.0 percentage points.
If you make your own fund selections, Direct is meaningfully better. The 1% annual gap compounds to ~25% lower terminal corpus over 20 years.
Compounded impact
A ₹10 lakh investment over 20 years at an assumed 12% gross CAGR:
- 0.5% TER (well-run direct equity fund): terminal value ≈ ₹81 lakh
- 1.5% TER (regular plan equity fund): terminal value ≈ ₹68 lakh
- 2.0% TER (small AUM regular plan): terminal value ≈ ₹62 lakh
Same fund choice, same gross strategy, different TER → 30% gap in terminal wealth.
What's NOT in TER
- STT (Securities Transaction Tax) — paid on equity transactions; covered separately.
- Stamp duty — 0.005% on purchases.
- Exit load — if applicable on early redemption.
- Personal tax — capital gains tax is your responsibility.
Sources
- SEBI — Total Expense Ratio Regulations · accessed Jun 2026
- AMFI — Mutual Fund Expense Ratio Explained · accessed Jun 2026