According to the SEBI (Mutual Funds) Regulations of 1996, Mutual Funds have the authority to levy various operational expenses for managing a mutual fund scheme. These expenses include sales and marketing/advertising expenses, administrative costs, transaction fees, investment management charges, registrar fees, custodian fees, and audit fees, all calculated as a percentage of the fund’s daily net assets. Collectively, these expenses associated with operating and managing a scheme are termed as the Total Expense Ratio in Mutual Funds. The TER is determined as a percentage of the scheme’s average Net Asset Value (NAV), with the daily NAV disclosed after deducting these expenses.
Currently, in India, the expense ratio is fungible, meaning there is no specific limit on any individual type of permitted expense as long as the total expense ratio remains within the prescribed limit. The regulatory limits of the TER that a Mutual Fund Asset Management Company (AMC) can incur or charge to the fund have been outlined under Regulation 52 of the SEBI Mutual Fund Regulations.
As you can see from below table, as the assets grow for a scheme, total expense ratio of Mutual Funds reduces. This is very natural as most of the expenses like Salaries, admin cost does not really change when Fund house manages larger funds.
| Assets Under Management (AUM) | Maximum TER as a percentage of daily net assets | |
| TER for Equity funds | TER for Debt funds | |
| On the first Rs. 500 crores | 2.25% | 2.00% |
| On the next Rs. 250 crores | 2.00% | 1.75% |
| On the next Rs. 1,250 crores | 1.75% | 1.50% |
| On the next Rs. 3,000 crores | 1.60% | 1.35% |
| On the next Rs. 5,000 crores | 1.50% | 1.25% |
| On the next Rs. 40,000 crores | Total expense ratio reduction of 0.05% for every increase of Rs.5,000 crores of daily net assets or part thereof. | Total expense ratio reduction of 0.05% for every increase of Rs.5,000 crores of daily net assets or part thereof. |
| Above Rs. 50,000 crores | 1.05% | 0.80% |
Furthermore, mutual funds are permitted to levy an additional charge of up to 30 basis points (bps) if the new investments from retail investors residing in cities beyond the top 30 (B30) cities meet certain criteria.
These criteria stipulate that the new inflows from B30 cities must constitute either (a) at least 30% of the gross new inflows in the scheme, or (b) 15% of the average assets under management (year to date) of the scheme, whichever is higher. This incentive is designed to promote investments in mutual funds from tier-2 and tier-3 cities.
The Total Expense Ratio (TER) directly influences a scheme’s Net Asset Value (NAV) – the lower the expense ratio, the higher the NAV. Consequently, TER serves as a critical factor when choosing a mutual fund scheme.
In accordance with current SEBI regulations, mutual funds are obligated to disclose the TER of all schemes on a daily basis.
