TER regulation and slabs for Indian mutual funds

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 TER caps by scheme category and AUM slab through the SEBI (Mutual Funds) Regulations 1996 and accompanying circulars, 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

Equity-oriented schemes

SEBI’s TER cap for equity-oriented schemes is structured by AUM slab:

The slab structure incentivises AMCs to grow scheme AUM, since lower TER applies on incremental AUM above each slab threshold.

Debt-oriented schemes

For debt-oriented schemes:

Debt-oriented schemes have lower caps than equity-oriented schemes, reflecting the lower research and operational intensity of debt management.

Index funds and ETFs

For index funds and exchange-traded funds (ETFs) , the maximum TER is capped at 1.00 per cent. The lower cap reflects the passive nature: no active stock selection required, lower research costs, lower turnover.

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)

For Fund of Funds (FoFs), the maximum TER varies based on the underlying schemes:

• FoF investing in domestic equity-oriented schemes: Maximum 2.25%.
• FoF investing in domestic debt-oriented schemes: Maximum 2.00%.
• FoF investing in international or overseas schemes: Maximum 2.25%.

The TER charged at the FoF level is in addition to the TER of the underlying schemes, creating a double-TER structure that investors should factor in when evaluating FoFs.

Sectoral and thematic schemes

Sectoral and thematic equity schemes follow the standard equity TER slabs but with a 5 bps additional allowance for the higher research costs.

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

Pre-2018: higher caps

Until 2018, equity-oriented schemes could charge up to 2.50 per cent TER on the first AUM slab. SEBI progressively reduced these caps to the current 2.25 per cent maximum.

2018-2019: SEBI reform wave

SEBI in 2018-2019 introduced multiple TER reforms:

• Lower top-slab caps (from 2.50 to 2.25 per cent for equity, etc.).
• Reduced upfront commissions to distributors (capped at scheme TER level).
• Stricter trail commission disclosure.

2023-2024: ongoing consultation

SEBI has consulted on further TER reductions for very-large schemes (above Rs 50,000 crore AUM), reflecting concerns that AMC scale economies should be passed on to investors more aggressively.

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:

• Current TER in the scheme information document (SID) and key information memorandum (KIM).
• Half-yearly TER disclosure in the scheme factsheet.
• Changes in TER through SID/KIM updates.

See also

• Mutual funds in India
• Total Expense Ratio (TER)
• Direct vs regular plan TER differential
• Direct-to-regular and regular-to-direct switch implications
• Mutual fund exit load
• Index fund
• ETF in India
• Zerodha Fund House
• Jio BlackRock Mutual Fund
• Fund of funds
• SEBI (Mutual Funds) Regulations 1996
• AMFI
• NAV computation

External references

• SEBI
• AMFI India

References

1. SEBI (Mutual Funds) Regulations 1996 covering TER provisions.
2. SEBI master circular on Total Expense Ratio.
3. SEBI 2018-2019 TER reduction circulars.
4. AMFI Best Practice Guidelines on TER disclosure.