Total Expense Ratio (TER) in Mutual Funds: SEBI’s 2026 Expense Framework

When investing in a mutual fund, returns are important, but so is the cost of managing your investment. One of the key costs investors should understand is the Total Expense Ratio (TER), which represents the recurring expenses incurred in operating a mutual fund scheme. Since these expenses are reflected in the scheme's Net Asset Value (NAV), they can influence long-term investment returns. With SEBI's revised expense disclosure framework effective from 1 April 2026, investors now receive greater transparency through the separate disclosure of the Base Expense Ratio (BER) and other applicable charges. Understanding how TER works can help you compare mutual funds more effectively and make informed investment decisions.

Key Takeaways

• Total Expense Ratio (TER) represents the annual cost of managing and operating a mutual fund and is reflected in the scheme's Net Asset Value (NAV).
• Under SEBI's revised expense framework (effective 1 April 2026), mutual fund expenses are disclosed separately through the Base Expense Ratio (BER), brokerage and transaction costs, exchange and regulatory charges and statutory levies.
• Direct Plans generally have a lower TER than Regular Plans because they do not include distributor commissions.
• Changes in a scheme's Assets Under Management (AUM) can influence the maximum permissible BER, but a higher AUM does not automatically result in a lower TER.
• Investors should compare the TER of funds within the same category and evaluate it alongside performance, risk profile, investment objective and portfolio quality.

What is Total Expense Ratio (TER)?

Total Expense Ratio (TER) is the annual cost that investors bear for investing in a mutual fund, expressed as a percentage of the scheme's average Assets Under Management (AUM). It reflects the recurring expenses associated with managing and administering the fund and is automatically accounted for in its Net Asset Value (NAV) rather than being charged separately. Under SEBI's revised expense disclosure framework, effective 1 April 2026, mutual funds provide a detailed breakdown of these costs to enhance transparency for investors.

Why is Total Expense Ratio Important?

The Total Expense Ratio (TER) is important because it directly influences the cost of investing in a mutual fund. Since the scheme's recurring expenses are reflected in its Net Asset Value (NAV), TER affects the returns investors ultimately receive. While the impact of a small difference in TER may appear insignificant over a short period, it can become substantial over the long term as investment returns compound. For instance, assume two mutual funds have similar investment objectives and earn the same return before expenses. If one scheme has a lower TER than the other, it is likely to deliver higher net returns over time because a smaller portion of its assets is used to meet operating expenses, provided all other factors remain comparable.

Comparing the TER of similar mutual fund schemes can help investors:

• Understand the ongoing cost of investing.
• Evaluate the cost efficiency of comparable funds.
• Compare Direct and Regular plans.
• Estimate the potential impact of expenses on long-term returns.
• Determine whether a fund's costs are reasonable relative to its investment strategy and performance.

However, a low TER alone does not make a mutual fund a better investment. Factors such as the fund's investment objective, portfolio composition, risk profile, consistency of performance and the fund manager's ability to execute the investment strategy should also be considered before making an investment decision.

How Total Expense Ratio (TER) Functions?

Many investors wonder how TER is actually charged. Unlike brokerage or transaction fees, TER is not deducted from your bank account. Instead, the mutual fund deducts the expense from the scheme's total assets every day before calculating the NAV.

The process works as follows:

1. The mutual fund collects money from investors.
2. The fund manager invests the pooled money according to the scheme's objective.
3. Every day, operating expenses are calculated on a proportionate basis.
4. These expenses are deducted from the fund's total assets.
5. The NAV is calculated after accounting for these expenses.

This means investors automatically bear the expenses through a slightly lower NAV rather than making separate payments.

For example:

• Gross portfolio return: 12%
• TER: 1%
• Approximate net return before taxes and exit charges: 11%

Although this is a simplified example, it demonstrates how TER directly influences investor returns over time.

Calculating the Total Expense Ratio (TER): Formula Explained

The Total Expense Ratio (TER) is calculated by comparing a mutual fund's annual expenses with its average Assets Under Management (AUM). Expressing these expenses as a percentage allows investors to compare the cost of different mutual fund schemes regardless of their size.

Formula -

TER = (Annual Expenses ÷ Average Assets Under Management) × 100

Where:

• Annual Expenses refer to the expenses associated with managing and operating the mutual fund during the year.
• Average Assets Under Management (AUM) is the average value of the assets managed by the scheme over the same period.

Components of TER

The Total Expense Ratio (TER) consists of different types of expenses that together represent the overall cost of investing in a mutual fund. To improve transparency, SEBI's revised expense disclosure framework, effective 1 April 2026, requires Asset Management Companies (AMCs) to disclose these costs separately, enabling investors to understand how the total expense is made up.

1) Base Expense Ratio (BER)

The Base Expense Ratio (BER) covers the regular expenses incurred by the AMC to manage and administer a mutual fund scheme. It generally includes fund management fees, registrar and transfer agent (RTA) charges, custodian fees, trustee expenses, audit costs, administrative expenses, investor servicing and other operational costs necessary for running the scheme. BER is the component of fund expenses that is subject to SEBI's prescribed limits.

2) Brokerage and Transaction Costs

Whenever a mutual fund buys or sells securities, it incurs transaction related expenses. These may include brokerage, exchange transaction charges, clearing and settlement costs and similar expenses directly associated with executing trades. Since these costs depend on the fund's trading activity, they can vary from one period to another.

3) Exchange and Regulatory Charges

Mutual funds may also incur charges payable to recognised stock exchanges, clearing corporations, depositories and regulatory authorities while carrying out investment transactions. Under the revised disclosure framework, these costs are presented separately to provide greater clarity to investors.

4) Statutory Levies

Certain charges arise from taxes and statutory requirements rather than the fund's day to day operations. These may include Goods and Services Tax (GST), Securities Transaction Tax (STT), Commodity Transaction Tax (CTT), stamp duty and other levies applicable under prevailing laws. As these are imposed by law, they are disclosed separately from the AMC's operating expenses.

By separating these components, the revised SEBI framework gives investors a clearer picture of the costs associated with a mutual fund and makes it easier to compare expense disclosures across different schemes.

Reasons for frequent changes in TER

The Total Expense Ratio (TER) of a mutual fund may change over time as the expenses associated with managing the scheme or the fund's asset base change. Asset Management Companies (AMCs) can revise the expense ratio only in accordance with SEBI's regulations and must disclose any changes to investors.

The most common reasons for changes in TER include:

1) Change in Assets Under Management (AUM)

A significant increase or decrease in a scheme's Assets Under Management (AUM) can affect its expense ratio. As the asset base grows, operating expenses may be spread across a larger pool of assets, potentially reducing the expense ratio. Conversely, a decline in AUM may increase the cost per unit of assets managed.

2) Revision in the Base Expense Ratio (BER)

Under SEBI's revised expense framework, an AMC may revise the Base Expense Ratio (BER) within the prescribed regulatory limits. Any such revision affects the overall expense ratio disclosed for the scheme.

3) Changes in Brokerage and Transaction Costs

The cost of buying and selling securities varies depending on the fund's trading activity. Since brokerage and transaction costs are disclosed separately under the revised framework, changes in these expenses can influence the overall cost borne by investors.

4) Changes in Statutory or Regulatory Charges

Government taxes, regulatory fees, exchange charges or other statutory levies may change due to amendments in applicable laws or regulations. Such changes can affect the total expenses associated with investing in a mutual fund.

How TER Impacts Mutual Fund Returns?

The Total Expense Ratio (TER) influences the returns earned by mutual fund investors because the scheme's recurring expenses are reflected in its Net Asset Value (NAV). As these expenses are accounted for in the NAV, they reduce the value of the fund's assets available to investors over time. Even a small difference in TER can affect long-term investment outcomes. Since mutual fund returns compound over the investment period, recurring expenses can also have a compounding effect on the final corpus.

SEBI's Latest Expense Ratio Framework (Effective 1 April 2026)

Effective 1 April 2026, the Securities and Exchange Board of India (SEBI) introduced a revised framework for disclosing mutual fund expenses under the SEBI (Mutual Funds) Regulations, 2026. The objective is to improve transparency by providing investors with a clearer view of the costs associated with investing in a mutual fund.

A key feature of the revised framework is the introduction of the Base Expense Ratio (BER). BER represents the investment management and recurring operational expenses of a mutual fund scheme that are permitted under SEBI regulations. Unlike the earlier framework, SEBI now prescribes regulatory limits specifically for BER, with the permissible limits varying according to the scheme category and its Assets Under Management (AUM).

The revised framework also requires Asset Management Companies (AMCs) to separately disclose expenses that are not part of BER. These include brokerage and transaction costs, exchange and regulatory charges and applicable statutory levies such as GST, Securities Transaction Tax (STT), Commodity Transaction Tax (CTT) and stamp duty. Separating these expenses enables investors to distinguish between AMC managed operating costs and charges arising from trading activity, regulation or taxation.

By replacing the earlier TER based expense limits with BER based limits and requiring a detailed disclosure of other charges, the revised framework promotes greater consistency in expense reporting and helps investors compare mutual fund schemes more effectively.

SEBI Prescribed Maximum Base Expense Ratio (BER) Limits (Effective 1 April 2026)

1) Close Ended Schemes

2) Index Funds / ETFs

3) Fund of Funds

4) Other Open Ended Schemes – Equity Oriented

5) Other Open Ended Schemes – Non Equity

Direct vs Regular Plan TER

When comparing Direct vs Regular mutual fund plans, one of the key differences is the Total Expense Ratio (TER). Since the cost structure differs between the two, understanding this distinction can help investors choose a plan that aligns with their investment preferences.

Direct Plan: A Direct Plan allows investors to invest directly with the Asset Management Company (AMC) without involving a distributor or intermediary. As there are no distribution commissions, Direct Plans generally have a lower TER, which can result in relatively higher net returns over the long term, provided all other factors remain the same.

Regular Plan: A Regular Plan is purchased through a distributor, broker or financial advisor. The TER is generally higher because it includes distribution and intermediary-related expenses. In return, investors may receive assistance with fund selection, portfolio reviews and ongoing investment support.

How to evaluate TER?

There is no fixed Total Expense Ratio (TER) that is considered good for every mutual fund. A suitable TER depends on the fund category, investment strategy, and the value the fund offers to investors.

When evaluating TER, consider the following:

• Compare TER only within the same fund category, as expense ratios vary across equity, debt, hybrid, index funds and ETFs.
• Lower TER generally means lower investment costs, which can benefit long-term returns if other factors remain the same.
• Do not rely on TER alone. Evaluate it alongside the fund's investment objective, historical performance, risk profile, portfolio quality and consistency of returns.

A reasonable TER is one that is competitive within its category and justified by the fund's overall performance and investment strategy.

How Changes in AUM Impact TER?

A mutual fund's Assets Under Management (AUM) can influence its Total Expense Ratio (TER) because SEBI prescribes Base Expense Ratio (BER) limits based on the scheme's daily net AUM. As a fund's AUM moves into a higher slab, the maximum BER that can be charged on the incremental assets decreases. For example, the first 500 crore of daily net AUM can have a maximum BER of 2.10% for equity oriented schemes and 1.85% for other than equity oriented schemes. This slab based structure allows the benefits of economies of scale to be shared with investors as the size of the mutual fund grows. However, a larger AUM does not automatically result in a lower TER. The actual expense ratio charged by a scheme depends on the expenses incurred by the Asset Management Company (AMC) and must remain within the limits prescribed by SEBI.

TER vs Exit Load / Other Charges

Many new investors confuse the Total Expense Ratio with Exit Load, but they serve different purposes.

What Are the Limitations of the TER?

Although TER is an important measure of cost, it should not be treated as the only criterion for selecting a mutual fund.

Some of its key limitations include:

1) Does Not Measure Performance

A low TER does not guarantee superior returns. A well-managed fund with a slightly higher TER may outperform a cheaper fund over the long term.

2) Ignores Investment Risk

Expense ratio provides no information about portfolio risk, volatility or downside protection.

3) Does Not Reflect Portfolio Quality

TER says nothing about the quality of the underlying investments or the fund manager's expertise.

4) Category Differences

Different fund categories naturally have different expense structures. Comparing TER across unrelated categories may lead to incorrect conclusions.

5) TER Can Change

Since Asset Management Companies can revise TER within SEBI's prescribed limits, the expense ratio today may not remain the same in the future. For these reasons, TER should always be evaluated alongside factors such as investment objective, historical performance, consistency, risk profile and portfolio composition.

Conclusions

The Total Expense Ratio (TER) is an important measure of the cost of investing in a mutual fund, as it directly influences the returns investors receive over time. While understanding TER helps compare the cost efficiency of similar schemes, it should always be assessed alongside factors such as the fund's investment objective, portfolio quality, risk profile and long-term performance. With SEBI's revised expense disclosure framework effective from 1 April 2026, investors now benefit from greater transparency through the separate disclosure of the Base Expense Ratio (BER) and other applicable charges, making it easier to understand and compare the true cost of investing across mutual fund schemes.

FAQs

1) What is the full form of TER?

TER stands for Total Expense Ratio. It is the annual percentage charged by a mutual fund to cover the costs of managing and operating the scheme.

2) What does a 0.75% expense ratio mean?

A 0.75% expense ratio means the mutual fund deducts operating expenses equivalent to 0.75% of its average Assets Under Management annually. These expenses are reflected in the fund's NAV and are not charged separately to investors.

3) What happens if the TER increases?

If the TER increases, a larger portion of the fund's assets is used to cover operating expenses. Assuming all other factors remain the same, investors may receive slightly lower net returns because more expenses are deducted from the scheme.

4) Does SEBI cap the total expense ratio?

SEBI prescribes maximum limits on the Total Expense Ratio that mutual funds can charge. These limits vary based on factors such as the scheme's Assets Under Management (AUM) and category.

5) What is the TER for index funds and ETFs?

Index funds and ETFs usually have lower TERs than actively managed funds because they passively track a benchmark index.

6) Is TER deducted separately from my investment?

Investors do not pay TER as a separate charge. It is deducted proportionately from the mutual fund's assets on a daily basis and is reflected in the Net Asset Value (NAV).

7) Should I always choose the mutual fund with the lowest TER?

Not necessarily. While a lower TER helps reduce costs, investors should also consider the fund's long-term performance, risk profile, investment objective, portfolio quality, fund manager's track record and overall suitability before making an investment decision.

Disclaimers

Investors may consult their Financial Advisors and/or Tax advisors before making any investment decision.

These materials are not intended for distribution to or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation.  The distribution of this document in certain jurisdictions may be restricted or totally prohibited and accordingly, persons who come into possession of this document are required to inform themselves about, and to observe, any such restrictions.

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