Total expense ratio in mutual funds

The total expense ratio (TER) is the annual charge that a mutual fund levies on its scheme’s assets to recover all costs of running the fund, expressed as a percentage of the scheme’s average daily net assets (AUM). It is the single most important cost number investors should examine before selecting a fund, because it is deducted from returns every day before the net asset value (NAV) is published.

What the TER covers

Regulation 66 of the SEBI (Mutual Funds) Regulations 2026, in force from 1 April 2026 (Regulation 52 of the 1996 regulations before that), permits a mutual fund to recover the following expenses from scheme assets:

• Investment management and advisory fees paid to the asset management company (AMC).
• Trustee fees charged by the board of trustees.
• Custodian fees for safe-keeping of securities.
• Registrar and transfer agent (RTA) fees for unitholder servicing.
• Audit fees, legal fees, and costs of statutory compliance.
• Distribution and brokerage expenses (applicable only to regular plans; direct plans do not bear these).
• Goods and Services Tax (GST) at 18 per cent on every expense head. From 1 April 2026 GST and other statutory levies sit outside the capped base expense ratio but inside the published TER (SEBI Master Circular for Mutual Funds, 20 March 2026, para 11.2.4).

The additional expense of up to 0.30 per cent for inflows from beyond the top 30 cities (B30) has been in abeyance since 1 March 2023 (AMFI circular CIR/ARN-23/2022-23) and has no basis in the 2026 regulations.

Under Regulation 67 of the 2026 regulations the TER is the base expense ratio plus brokerage (capped by Regulation 66(9) at 0.06 per cent of trade value in the cash market and 0.02 per cent in derivatives), transaction cost and statutory levies. Impact cost and bid-ask spreads on portfolio trades do not appear in the TER.

Formula

\[ \text{TER} = \frac{\text{Total annual expenses charged to the scheme}}{\text{Average daily net assets}} \times 100 \]

Because the TER is an annualised ratio, the daily deduction from NAV is:

\[ \text{Daily NAV deduction} = \frac{\text{TER}}{365} \]

If a scheme has a TER of 1.20 per cent per annum and an average AUM of Rs 10,000 crore, the daily expense charge is approximately Rs 3.29 crore, and the annual charge is Rs 120 crore.

SEBI’s slab-based TER limits

From 1 April 2026 the caps are base expense ratio limits under Regulation 66(7)(c) of the SEBI (Mutual Funds) Regulations 2026: 2.10, 1.90, 1.60, 1.50 and 1.40 per cent on the first five equity slabs, falling to 0.95 per cent above Rs 50,000 crore, and 1.85 per cent falling to 0.70 per cent for other schemes. The full 2026 table is at total expense ratio of Indian mutual funds . The table below is the TER ceiling that applied from 1 April 2019 to 31 March 2026, set by the SEBI (Mutual Funds) (Fourth Amendment) Regulations 2018 (GN/2018/51, 13 December 2018):

Equity-oriented schemes (including hybrid schemes with ≥65% equity)

Other than equity-oriented schemes (debt, index, ETFs, FoFs)

For schemes other than equity oriented the 2019 to 2026 ceiling ran 2.00, 1.75, 1.50, 1.35 and 1.25 per cent, down to 0.80 per cent above Rs 50,000 crore. Index funds and ETFs had a 1.00 per cent cap. Funds of funds had 1.00 per cent (investing in liquid schemes, index funds and ETFs), 2.25 per cent (at least 65 per cent in equity-oriented schemes) and 2.00 per cent (others), each including the underlying schemes’ expenses.

Directly relevant exception: index funds and ETFs

The index fund and ETF cap was 1.50 per cent under the original 1996 regulations, 1.00 per cent from 1 April 2019 under the Fourth Amendment Regulations 2018, and is a 0.90 per cent base expense ratio from 1 April 2026 under Regulation 66(7)(b)(i). SEBI’s consultation paper of 28 October 2025 had proposed 0.85 per cent. Investors comparing passive funds should look at the actual TER disclosed on the AMC fact sheet rather than the ceiling.

How TER is deducted in practice

TER is not charged as a separate invoice to the investor. Instead, NAV is published net of daily accrued expenses. If a scheme’s gross NAV (before expenses) grows from Rs 100.000 to Rs 100.030 on a given day, but the daily TER accrual is Rs 0.003 per unit, the published NAV is Rs 100.027.

This means:

• Investors never see a line item for TER in their statement.
• The return reported in a fact sheet or portal is already net of TER.
• A higher TER creates a permanent drag on compounded returns.

Impact of TER on long-term wealth

The compounding effect of even a small TER differential is substantial. Consider two funds with identical gross returns of 12 per cent per annum over 20 years on a Rs 10 lakh lump sum:

The Rs 16.5 lakh difference between the lowest and highest TER scenario arises entirely from costs, not manager skill.

Direct vs regular plan TER differential

The same scheme’s direct plan always carries a lower TER than its regular plan because the regular plan embeds the distributor commission. The difference, typically 0.60 to 1.20 percentage points for equity funds, is a direct transfer from investor returns to distributors. See Direct vs regular plan TER differential for a full comparison.

Total expense ratio vs expense ratio vs management fee

These three terms are frequently confused:

• Management fee (also called investment management fee): the portion of TER paid exclusively to the AMC for portfolio management, typically 0.50 to 0.80 per cent for equity funds.
• Expense ratio: in Indian mutual fund usage, synonymous with TER. In US usage, it may or may not include trading costs.
• TER: the all-in cost figure regulated and disclosed by SEBI; the definitive number for Indian investors.

Disclosure requirements

AMCs must:

1. Disclose the scheme’s TER on their website by 9:00 PM on the same day the NAV is published.
2. Show the TER separately for direct and regular plans.
3. Include a TER comparison table in the scheme information document (SID).
4. Report TER to AMFI for aggregation on amfiindia.com.

SEBI circular SEBI/HO/IMD/IMD-II DOF3/P/CIR/2022/075 (May 2022) tightened real-time TER disclosure obligations.

TER and the tracking error relationship

For index funds, TER is the dominant driver of tracking error , the deviation of a fund’s returns from its benchmark total return index . A higher TER creates a larger guaranteed underperformance relative to the index, regardless of how well the fund replicates the portfolio.

B30 incentive component

To encourage financial inclusion, SEBI permits AMCs to charge an additional 0.30 per cent TER if net inflows from beyond the top 30 cities are at least 0.30 per cent of AUM or Rs 25 crore, whichever is lower. This incremental charge goes entirely to distribution and sales promotion in B30 cities and is not retained by the AMC.

Goods and Services Tax on TER

GST at 18 per cent applies to the expenses charged to a scheme. From 1 April 2026 all statutory levies, GST included, sit outside the capped base expense ratio and are added on top of it in the published TER (Regulation 66(7) of the SEBI (Mutual Funds) Regulations 2026; SEBI Master Circular for Mutual Funds, 20 March 2026, para 11.2.4). Under the 1996 regulations only GST on the investment management fee could be charged above the TER cap, and GST on every other expense had to fit inside it. See GST on mutual fund management fees for details.

Comparing TER across categories

Typical TER ranges for Indian mutual funds as of 2024 to 25:

Caveats and common misconceptions

• Lower TER does not always mean better returns. A skilled active fund manager generating 2 per cent alpha per annum justifies a higher TER than a mediocre manager with a low TER.
• TER does not capture transaction costs inside the portfolio. A high portfolio turnover ratio scheme incurs brokerage, STT, and impact costs that do not appear in TER but erode returns.
• TER changes over time. As a scheme’s AUM grows, its TER typically falls due to scale economies and SEBI’s slab structure.
• Published TER is an annualised number. Investors who hold a fund for less than a year still pay TER proportionate to holding period through the daily NAV deduction.

Key SEBI circulars on TER

See also

• Direct vs regular plan TER differential
• Tracking error in index funds
• Portfolio turnover ratio
• GST on mutual fund management fees
• Mutual fund
• SEBI
• AMFI

References

1. SEBI (Mutual Funds) Regulations 2026, Regulations 66 and 67; SEBI (Mutual Funds) Regulations, 1996, Regulation 52, as amended.
2. SEBI circular SEBI/HO/IMD/DF2/CIR/P/2018/137 dated 22 October 2018, TER restructuring.
3. SEBI circular SEBI/HO/IMD/IMD-II DOF3/P/CIR/2022/075 dated 6 May 2022, TER disclosure.
4. AMFI, Total Expense Ratio disclosures at amfiindia.com.
5. SEBI consultation paper on review of total expense ratio, 18 May 2023; SEBI consultation paper on comprehensive review of the SEBI (Mutual Funds) Regulations 1996, 28 October 2025.