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Investing TER expense ratio SEBI

TER regulation and slabs for Indian mutual funds

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The Total Expense Ratio (TER) is the annual percentage of scheme AUM charged by mutual fund AMCs as fees and operational costs. TER is the principal direct charge on a mutual fund investment: every rupee of TER reduces investor return by the same rupee on a one-to-one basis. SEBI prescribes maximum caps by scheme category and AUM slab through Regulation 66 of the SEBI (Mutual Funds) Regulations 2026, in force from 1 April 2026 in place of the SEBI (Mutual Funds) Regulations 1996 , with AMCs free to charge less than the cap but not more.

For an Indian retail investor, TER directly determines the compounding gap between gross scheme performance and net investor return over multi-year holding periods. A 1.5 per cent TER versus a 0.5 per cent TER on the same underlying portfolio compounds to a 25-40 per cent corpus difference over 25-30 year horizons. The direct plan versus regular plan distinction further widens this gap.

This article covers the SEBI TER slab structure, the per-category caps, the direct-plan TER differential, the historical TER reduction journey, and the per-AMC TER positioning patterns.

SEBI TER slab structure

From 1 April 2026 the caps are set by Regulation 66(7) of the SEBI (Mutual Funds) Regulations 2026 (F. No. SEBI/LAD-NRO/GN/2026/294), and they cap the base expense ratio, not the whole TER. Regulation 67 defines the TER as the base expense ratio plus brokerage, transaction cost and statutory levies including GST, so the slab figures below are not comparable one for one with the pre-2026 caps. The full framework, with a worked calculation, is at total expense ratio of Indian mutual funds .

Equity-oriented and other open-ended schemes

Daily net assetsEquity oriented, from 1 April 2026Other, from 1 April 2026Equity TER cap, 1 April 2019 to 31 March 2026Other TER cap, 1 April 2019 to 31 March 2026
First Rs 500 crore2.10%1.85%2.25%2.00%
Next Rs 250 crore1.90%1.65%2.00%1.75%
Next Rs 1,250 crore1.60%1.40%1.75%1.50%
Next Rs 3,000 crore1.50%1.25%1.60%1.35%
Next Rs 5,000 crore1.40%1.15%1.50%1.25%
Next Rs 40,000 crore0.05% lower for every Rs 5,000 crore or partsame basis0.05% lower for every Rs 5,000 crore or partsame basis
Above Rs 50,000 crore0.95%0.70%1.05%0.80%

Table: Expense caps for open-ended schemes. Sources: Regulation 66(7)(c), SEBI (Mutual Funds) Regulations 2026; Regulation 52(6), SEBI (Mutual Funds) Regulations 1996, as amended by the Fourth Amendment Regulations 2018 (GN/2018/51, 13 December 2018).

Each rate applies only to the assets inside its slab, so a scheme’s cap is the blend across slabs. Liquid, overnight and debt schemes all take the “other” column; there is no separate liquid-fund cap.

Index funds and ETFs

For index funds and exchange-traded funds (ETFs) , Regulation 66(7)(b)(i) caps the base expense ratio at 0.90 per cent from 1 April 2026. The cap from 1 April 2019 to 31 March 2026 was a 1.00 per cent TER, and 1.50 per cent before that.

In practice, leading passive index funds in India charge TERs well below the cap:

  • Nifty 50 index funds from Zerodha Fund House : 0.18-0.25 per cent.
  • Nifty 50 index funds from large AMCs: 0.10-0.50 per cent.
  • Nifty 50 ETFs: 0.05-0.15 per cent.

Fund of funds (FoFs)

Under Regulation 66(7)(b) of the 2026 regulations, a fund of funds’ cap includes the weighted average expense ratio of the underlying schemes:

  • FoF investing in liquid schemes, index funds and ETFs: 0.90% (1.00% to 31 March 2026).
  • FoF with at least 65% in equity-oriented schemes: 2.10% (2.25% to 31 March 2026).
  • Any other FoF: 1.85% (2.00% to 31 March 2026).

There is no separate cap for an overseas fund of funds; it falls into one of these lines by its equity share. Regulation 66(8) also limits the fund-of-funds layer to twice the weighted average base expense ratio of the underlying schemes.

Close-ended schemes

Regulation 66(7)(a) caps close-ended schemes at a 1.00 per cent base expense ratio if equity oriented and 0.80 per cent otherwise. Sectoral and thematic schemes take the ordinary equity slabs; no additional allowance exists for them.

Direct plan versus regular plan TER

The structural differential

Every scheme offers two plan variants:

  • Regular plan: Includes distributor commission embedded in TER.
  • Direct plan: No distributor commission. TER is correspondingly lower by approximately 0.5 to 1.0 per cent annualised across equity-oriented schemes.

The direct vs regular TER differential is the structural advantage that direct-plan investors have over regular-plan investors.

Direct-plan TER examples

For a flexi-cap fund with the following TER structure:

  • Regular plan TER: 1.75 per cent.
  • Direct plan TER: 0.85 per cent.
  • Differential: 0.90 per cent.

Over a 20-year holding period with 12 per cent gross CAGR, this 0.90 per cent differential compounds to approximately 15-20 per cent corpus difference.

Distribution of regular-plan TER

The regular-plan TER’s distributor-commission component is paid as trail commission to the registered distributor:

  • Bank distribution: 0.5-1.0 per cent annualised.
  • National distributors: 0.5-1.0 per cent.
  • Independent Financial Advisors (IFAs): 0.5-1.0 per cent.
  • Online platforms (regular plan): 0.3-0.6 per cent.

Historical TER journey

1996 to 2019: the original slabs

From 1996 equity-oriented schemes could charge up to 2.50 per cent on the first Rs 100 crore, falling to 1.75 per cent above Rs 700 crore, and index funds and ETFs up to 1.50 per cent (SEBI board memorandum, October 2018, para 2.4).

2018 to 2019: the 2.25 per cent regime

SEBI circular SEBI/HO/IMD/DF2/CIR/P/2018/137 dated 22 October 2018 moved distribution to an all-trail commission model and banned upfront commission. The slabs themselves came from the SEBI (Mutual Funds) (Fourth Amendment) Regulations 2018, No. SEBI/LAD-NRO/GN/2018/51 dated 13 December 2018, in force 1 April 2019, which set the 2.25 per cent equity cap.

2023 to 2026: consultation and the 2026 regulations

SEBI’s consultation paper of 18 May 2023 proposed AMC-level slabs and bringing brokerage and GST inside the cap; it was not notified. The consultation paper of 28 October 2025 and the board decision of 17 December 2025 (Press Release No. 84/2025) produced the base expense ratio structure in force from 1 April 2026, with statutory levies outside the cap and brokerage limited to 0.06 per cent of trade value in the cash market and 0.02 per cent in derivatives.

Passive-investing pressure

The rise of low-cost passive index funds, particularly from Zerodha Fund House and the upcoming Jio BlackRock Mutual Fund , has created sustained downward pressure on TER for similar passive products at incumbent AMCs.

Per-AMC TER positioning

High-TER AMCs

Some AMCs operate near the SEBI caps:

  • Small AMCs without scale economies.
  • AMCs with predominantly regular-plan distribution.
  • Specialist active AMCs justifying premium TER through performance.

Low-TER AMCs

Some AMCs operate well below the caps:

  • Zerodha Fund House : ultra-low TER on passive schemes (under 25 bps).
  • Large AMCs with scale economies passing benefits to investors.
  • Direct-plan-only platforms with no distribution overhead.

Investor implications

For long-term investors, prioritising low-TER schemes within a chosen category typically delivers better net returns than chasing high-TER schemes with superior gross performance, given the empirical persistence of TER differences versus the non-persistence of gross performance.

How TER is charged

Daily accrual

TER is accrued daily as a liability in the scheme’s accounting:

  • Daily TER charge ≈ scheme AUM × annual TER / 365.
  • The daily charge reduces NAV by the corresponding per-unit amount.
  • Investors see the cumulative TER impact through lower NAV growth versus an equivalent no-TER scenario.

No direct invoice

TER is not invoiced to investors directly; it is deducted from scheme returns invisibly. Investors see the post-TER NAV, not the pre-TER NAV.

Transparency requirements

SEBI requires AMCs to disclose:

  • The TER of every scheme daily, scheme-wise and date-wise, on the AMC and AMFI websites in Format 7E (SEBI Master Circular for Mutual Funds, 20 March 2026, para 11.2.2).
  • Any change in base expense ratio to investors by email or SMS at least three working days in advance, except changes caused by movement in assets (para 11.4.1).
  • Expense disclosure in the scheme information document (SID) and key information memorandum (KIM).

See also

External references

References

  1. SEBI (Mutual Funds) Regulations 2026, Regulations 66 and 67; SEBI (Mutual Funds) Regulations 1996, Regulation 52, as amended by the Fourth Amendment Regulations 2018.
  2. SEBI Master Circular for Mutual Funds, 20 March 2026, Chapter 11.
  3. SEBI 2018-2019 TER reduction circulars.
  4. AMFI Best Practice Guidelines on TER disclosure.

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