Mutual Fund Expense Ratio: What TER Quietly Takes From Your Returns Every Year

Every mutual fund you hold charges you a fee, and you never see a bill for it. There is no debit in your bank statement and no line in your SIP confirmation. The mutual fund expense ratio, or TER (total expense ratio), is taken out of the fund’s assets bit by bit, and what you see is a NAV that is a little lower than it would otherwise be. Because the cut is small and invisible, most of us ignore it. Over ten or fifteen years, that is an expensive habit.

This guide covers what TER actually is under SEBI’s current rules, how the new base expense ratio slabs work, why direct plans are cheaper, and a worked example of what one percentage point costs over a long holding period.

What the mutual fund expense ratio really means

SEBI’s definition is plain. Under the SEBI (Mutual Funds) Regulations, 2026, total expense ratio means the ratio of all expenses charged to the investors of a scheme to the scheme’s total assets under management. So a TER of 1.5% means that, over a year, roughly 1.5% of the money in the scheme goes towards running it, paying the fund manager and paying distributors.

Two details matter here. First, the percentage is of assets, not of returns. A fund that earns nothing in a year still charges its full TER. A fund that falls 10% still charges it. Second, the limits are set as a percentage of daily net assets, which is why AMCs (asset management companies) accrue the expense every day in the NAV rather than collecting it once a year.

To put a rough number on that daily drip: on ₹1 lakh sitting in a scheme with a 1.5% TER, the annual cost is about ₹1,500, which works out to around ₹4 a day. Nobody notices ₹4. That is rather the point.

What goes into TER after April 2026

The rules changed this year. The SEBI (Mutual Funds) Regulations, 2026 came into force on April 1, 2026, and SEBI’s Master Circular for Mutual Funds dated March 20, 2026 lays down the formula AMCs now have to use:

TER = Base Expense Ratio (BER) + Brokerage Cost + Transaction Cost incurred for executing trades + Statutory levies (including GST)

The addenda that fund houses issued to explain the change, such as Tata Mutual Fund’s notice of March 30, 2026, break each piece down:

• Base expense ratio (BER). This is the core fee. It covers investment management and advisory fees, the scheme’s recurring expenses, and distribution commissions. It excludes statutory levies and transaction costs.
• Brokerage. Schemes can charge brokerage paid to execute trades over and above the BER, but only up to 0.06% of trade value for cash market trades and 0.02% of trade value for derivatives trades. Anything above those limits has to fit inside the BER.
• Transaction cost. Regulatory levies and charges from stock exchanges, clearing corporations and clearing houses. These sit outside the BER.
• Statutory levy. Taxes imposed by the central or state government, GST included.

Anything else is not supposed to touch the scheme at all. The Tata addendum states that expenses outside these heads have to be borne by the AMC, trustee or sponsor, and that no charges other than BER, brokerage, transaction cost, statutory levy and exit load can be charged to investors. The Aditya Birla Sun Life MF addendum of March 27, 2026 also notes that the old additional expense of up to 0.05% of daily net assets was removed from the effective date.

A fund that falls 10% in a year still charges its full expense ratio. TER is a cut of your assets, not a share of your gains.

The BER slabs: bigger funds must charge less

SEBI caps the base expense ratio, and for regular open-ended equity and debt schemes the cap shrinks as the fund grows. Here are the maximum BER limits as given in the Tata and Aditya Birla Sun Life addenda, both as a percentage of daily net assets:

Other categories have flat ceilings. Index funds and ETFs (exchange traded funds) are capped at a BER of 0.90%. Close-ended equity schemes are capped at 1.00% and other close-ended schemes at 0.80%. Fund of funds that invest in liquid schemes, index funds and ETFs are capped at 0.90%, those putting at least 65% in equity-oriented schemes at 2.10%, and other fund of funds at 1.85%, in each case including the weighted average expense of the underlying schemes.

Notice that the slabs are marginal, a bit like income tax slabs. A fund does not drop to 1.60% on its entire corpus the moment it crosses ₹750 crore. Only the money in that band gets the lower rate.

Worked example: the ceiling for a ₹3,000 crore equity fund

Take a hypothetical open-ended equity scheme with ₹3,000 crore of daily net assets. Using the slabs above, the most it could charge as BER in a year is:

• First ₹500 crore at 2.10% = ₹10.50 crore
• Next ₹250 crore at 1.90% = ₹4.75 crore
• Next ₹1,250 crore at 1.60% = ₹20.00 crore
• Remaining ₹1,000 crore (part of the ₹3,000 crore band) at 1.50% = ₹15.00 crore

That adds up to ₹50.25 crore, which is about 1.675% of the ₹3,000 crore corpus. So the blended ceiling for this fund is roughly 1.68%, before brokerage, transaction costs and GST are added on top. The actual BER can be lower, and for direct plans it will be, but it cannot be higher.

Direct plan vs regular plan: the same fund, two price tags

Every scheme comes in two versions. SEBI’s master circular requires AMCs to offer a separate direct plan for investments not routed through a distributor, and says that plan “shall have a lower expense ratio as no distribution commission is paid” under it. It also carries its own NAV.

The portfolio is identical. Same stocks, same bonds, same fund manager. The only difference is that the regular plan’s TER includes commission paid to the distributor who sold it to you, and that commission comes out of your returns every year you stay invested. The circular also bars a direct plan from charging more than the regular plan under any expense head, including the advisory fee.

Commission rules themselves are tight. AMCs must follow a full trail model, so distributors are paid a little every year rather than a lump sum upfront. The one carve-out is for SIPs by first-time mutual fund investors, where trail commission of up to 1% a year can be paid in advance for up to three years, on SIPs of up to ₹3,000 a month per scheme, paid from the AMC’s books and recovered pro-rata if the SIP stops early.

We are not saying regular plans are always wrong. If a good adviser keeps you from panic-selling in a crash, that commission may be the best money you spend. But you should know what you are paying for, and whether you are actually getting it.

What one percentage point costs over 15 years

Here is a simple illustration with made-up numbers, just to show the arithmetic. These are not returns from any real scheme.

Say you invest ₹5 lakh as a lump sum. Assume the fund’s portfolio earns 12% a year before expenses, every year, for 15 years. One investor holds the regular plan with a TER of 1.6%. Another holds the direct plan of the same fund with a TER of 0.6%. To keep it simple, treat the net return as the gross return minus TER.

The gap between the two plans is roughly ₹3.19 lakh, on the same portfolio and the same starting ₹5 lakh. A one-point difference in TER looks tiny on a factsheet. Compounded over 15 years, it ends up being more than 60% of the original investment in this example.

On a factsheet, one percentage point of TER looks like rounding. Over fifteen years of compounding it can eat a sizeable slice of what you put in.

That is why passive funds have such a structural edge in large-cap investing. If an active fund’s TER is a full point above an index fund tracking the same market, the manager has to beat the index by that point every year just to finish level. Our piece on the information ratio looks at how to check whether a manager is actually clearing that bar.

Where to check a scheme’s current TER

You don’t need to guess. SEBI’s master circular requires AMCs to disclose the TER of every scheme, scheme-wise and date-wise, on a daily basis, on their own websites under a separate “Total Expense Ratio of Mutual Fund Schemes” section, and on the AMFI website in a downloadable spreadsheet format. Tata MF, for instance, points investors to its total expense ratio page.

TER can also change. Under the master circular, if an AMC raises or otherwise changes a scheme’s BER, it has to inform investors by email or SMS at least three working days before the change takes effect, and update the website notice by then too. No prior notice is needed when the change comes from movement in AUM, or when the BER falls because of regulatory requirements.

How we would use TER when picking a fund

A few practical habits, none of them complicated:

• Compare within a category, not across. A debt fund and a small-cap fund have different ceilings and different work involved. Compare large-cap with large-cap, liquid with liquid.
• Weigh TER more heavily where returns are thin. In a liquid or overnight fund, the expense ratio can be a big share of what you earn. In a dynamic bond fund or gilt fund, the same logic holds: when yields are modest, every basis point of cost counts.
• For index exposure, cost is most of the story. Two Nifty 50 index funds hold the same stocks. Tracking quality and TER are what separate them. The same goes for commodity ETFs like a gold ETF.
• Don’t pick on TER alone for active funds. A cheap fund with a poor process is still a poor fund. Use TER as a filter and a tie-breaker, not the whole decision.
• Check which plan you actually hold. Your account statement or the scheme name will say “Direct” or “Regular”. Plenty of investors hold regular plans without having chosen to.

Thinking about costs is part of thinking about risk. A fee you pay with certainty every year is the one part of your return you can control upfront. We cover the broader discipline in our risk management guide.

Quick recap

TER is the annual cost of owning a mutual fund, expressed as a percentage of the scheme’s assets and taken out of the NAV daily. Since April 1, 2026, it is made up of a capped base expense ratio plus brokerage within limits, transaction costs and statutory levies. Bigger equity and debt funds face lower ceilings on the marginal slabs. Direct plans skip distributor commission, so they cost less on an identical portfolio. And over a long holding period, a single percentage point of cost compounds into real money.

Disclaimer: This article is for educational purposes only and is not investment advice. The worked examples use hypothetical numbers and do not represent any actual scheme. Mutual fund investments are subject to market risks; read all scheme-related documents carefully and consult a SEBI-registered investment adviser before making investment decisions.