Total Expense Ratio (TER) regulation and slabs, Indian mutual funds

The Total Expense Ratio (TER) is the annual percentage of a mutual fund scheme’s net assets that the asset management company (AMC) is permitted to charge as expenses for managing the scheme. In India, TER slabs are prescribed under Regulation 52 of the SEBI (Mutual Funds) Regulations, 1996 and are enforced by SEBI through the Investment Management Department. The current slab framework was significantly revised by SEBI circular SEBI/HO/IMD/DF2/CIR/P/2018/137 dated 22 October 2018, effective 1 April 2019, which reduced maximum permissible TERs for larger schemes and introduced a performance-linked additional TER for B30 cities. TER is the single largest determinant of the net return received by investors in the long run; regulatory compression of TER since 2012 has been one of SEBI’s most impactful investor protection measures.

Regulatory framework

Regulation 52 of the 1996 Regulations prescribes:

• Maximum recurring expense limits (TER slabs) for different scheme types and AUM tiers.
• Permitted additional charges over and above the base TER.
• The obligation to credit exit loads above one per cent back to the scheme.
• Prohibition on charging expenses not specified in the Regulations.

The TER is expressed as an annualised percentage; it is accrued daily from the scheme’s assets before NAV is computed and published. Investors bear the TER implicitly, the NAV already reflects the deduction.

Current TER slab structure (post 2018 revision)

Equity and equity-oriented hybrid schemes

Debt and other schemes (non-equity)

Special categories

• Liquid and overnight funds: Base TER of 1.05% (equity slab structure does not apply; a flat maximum applies).
• Exchange-Traded Funds (ETFs) and Index Funds: Maximum TER of 1.00% (SEBI further nudged AMCs to disclose actual TER, which is typically 0.05–0.20%).
• Fund of Funds (FoFs) investing in mutual funds: Maximum 0.50% additional TER over the weighted average TER of underlying schemes; total effective cost capped.
• Close-ended equity schemes: TER capped at the open-ended equity slab.
• Interval schemes: At par with debt scheme slabs.

Permitted additional charges

Over and above the base TER, Regulation 52(6A) and the 2018 circular permit certain specific charges:

1. B30 incentive additional TER: Up to 30 basis points (0.30%) may be charged on inflows from cities beyond the top 30 (B30 cities). Since 1 April 2019, this was revised to a maximum 0.05% on daily net assets if new inflows from B30 cities exceed 15% of total inflows (the B30/T30 incentive framework article covers this in detail).
2. GST on investment management fee: GST at 18% on the investment management fee component of the TER (not on the full TER) is charged to the scheme in addition to the TER cap.
3. Securities transaction tax (STT): Not included in TER; charged as a pass-through.
4. Brokerage and transaction costs: Capped at 0.12% of traded turnover for cash market transactions; included within TER for reporting purposes but accounted differently.

Direct Plan versus Regular Plan TER

Since SEBI’s circular dated 13 September 2012 (effective 1 January 2013), every mutual fund scheme must offer two plans:

• Regular Plan: Includes distribution commission paid to the mutual fund distributor (MFD). TER is higher.
• Direct Plan: No distributor involved; no distribution commission. TER is lower by the amount saved on commission.

SEBI requires that the TER difference between the Regular Plan and the Direct Plan be not less than the distribution commission paid in the Regular Plan. This rule prevents AMCs from narrowing the Direct-Regular spread through cross-subsidisation. In practice, the Direct Plan TER is typically 0.50–0.80 percentage points lower than the Regular Plan TER for actively managed equity funds, and 0.20–0.40 points lower for debt funds.

The Direct-Regular spread disclosure is mandatory in the KIM and SID.

Historical evolution of TER norms

Pre-2012

The original 1996 Regulations permitted a TER of 2.50% for equity schemes and 2.25% for debt schemes (flat, with no AUM-linked scaling). Additional expenses for investment management, custodian, and other services were permitted on top. In practice, equity fund TERs regularly exceeded 2.50% after including additional charges.

2012 revision

SEBI circular dated 13 September 2012 (effective 1 October 2012) made the first significant tightening:

• Introduced the AUM-linked sliding scale (replacing the flat cap).
• Abolished entry loads (already done in June 2009) and required exit loads collected above 1% to be credited to the scheme.
• Introduced the Direct Plan (lower TER for direct investors).
• Required AMCs to disclose TER on a daily basis on the AMFI website.

2018 revision (current structure)

SEBI circular SEBI/HO/IMD/DF2/CIR/P/2018/137 dated 22 October 2018 (effective 1 April 2019) introduced the current slab structure with steeper AUM-linked scaling, reduced maximum TERs for large schemes, and tightened the B30 additional TER to 0.05% (from 0.30% under the 2012 framework).

Post-2019 ETF/index fund cap

Following the rapid growth of passive funds, SEBI separately capped TER for index funds and ETFs at 1.00% (with expectations in practice of 0.05–0.30%) and required prominent disclosure of the tracking error, which reflects execution quality net of TER.

TER reporting and transparency

AMCs must:

• Publish the daily TER for each scheme and each plan on the AMFI website and their own website.
• Include the maximum permissible TER and the prevailing TER in the SID and KIM.
• Provide half-yearly TER disclosures in the scheme-wise income and expenditure account.
• Disclose any change in TER on the AMC website on the same day as the change, and communicate to investors through the account statement.

AMFI publishes consolidated TER data for all schemes in a machine-readable format (CSV) on its website on a daily basis, enabling third-party comparison platforms and financial advisers to track TER trends across the industry.

Investor implications

• Compounding effect: A TER differential of 1% over 20 years reduces the terminal corpus by approximately 18–20% relative to a zero-TER scenario. SEBI’s TER compression over 2012–2019 is estimated to have transferred several thousand crore rupees annually from AMC revenues to investor returns.
• Large-scheme advantage: The sliding scale means investors in larger schemes benefit from lower TERs, creating an implicit incentive for AMC consolidation.
• Direct Plan advantage: Over a 10-year horizon, the compounding benefit of the Direct Plan’s lower TER is significant for large-ticket investors, motivating the growth of the registered investment adviser (RIA) channel.

See also

• Mutual fund
• SEBI (Mutual Funds) Regulations, 1996
• B30/T30 incentive framework
• SEBI Investment Management Department
• Scheme Information Document
• Key Information Memorandum
• SEBI scheme rationalisation circular 2017
• Exit load cap rule
• Mutual fund industry in India
• Capital gains tax India

References

1. SEBI (Mutual Funds) Regulations, 1996, Regulation 52.
2. SEBI Circular SEBI/HO/IMD/DF2/CIR/P/2018/137, 22 October 2018, TER revision.
3. SEBI Circular dated 13 September 2012, Direct Plan and TER revision.
4. SEBI Circular dated 30 June 2009, Abolition of entry load.
5. SEBI Master Circular SEBI/HO/IMD/IMD-PoD-1/P/CIR/2024/137, 27 May 2024.
6. AMFI, “TER data portal”, amfiindia.com.