NISM-Series-V-A: Mutual Fund Distributors · Net Asset Value, Total Expense Ratio and Pricing of Units

Total Expense Ratio and Fund Expenses in Mutual Funds

Updated 11 October 2026

Total Expense Ratio (TER) is the annual percentage of a scheme's average net assets that goes to running it, including the management fee, distribution cost and other charges. It is deducted daily before NAV is declared. To solve questions, find the scheme type, apply the slab limit, add permitted extras, then compare plans.

Understand Total Expense Ratio and Fund Expenses

Running a mutual fund costs money. The AMC charges a management fee, and there are also registrar, custodian, audit, marketing and distribution costs. SEBI lets the scheme bear these costs, but only within limits set in the SEBI (Mutual Funds) Regulations.

The Total Expense Ratio (TER) is the total of these costs shown as a percentage of the scheme's average net assets. You never pay it as a separate bill. The scheme accrues it every day and deducts it from the scheme's assets. So the NAV you see is already net of expenses. A higher TER means a lower NAV growth and a lower return for the investor.

SEBI caps the TER using slabs. The cap falls as the scheme's assets grow, because large funds enjoy economies of scale. Equity-oriented schemes are allowed a higher cap than other schemes. Index funds, ETFs and close-ended schemes have their own caps. Some costs, such as GST on the management fee, are charged in addition to the base limit.

A regular plan has distribution costs and commission built into its TER. A direct plan has no distributor commission, so its TER is lower. Both plans hold the same portfolio, but they have separate NAVs. The direct plan's NAV grows faster over time.

Exams test the slab numbers, the difference between plans, what is and is not an expense, and the effect of TER on returns. The rules are revised from time to time, so check the latest SEBI circulars and your workbook edition.

Key formulas to remember

TER: TER (%) = Total annual scheme expenses ÷ Average net assets × 100; Expressed per year. Accrued daily and deducted from scheme assets before NAV is declared.
Equity-oriented scheme slabs (on average weekly net assets): First ₹500 crore: 2.25% | Next ₹250 crore: 2.00% | Next ₹1,250 crore: 1.75% | Next ₹3,000 crore: 1.60% | Next ₹5,000 crore: 1.50% | Above ₹10,000 crore: 0.05% lower for every ₹5,000 crore (or part) increase, down to a floor of 1.05%; These base limits are the maximum limits set in the SEBI (Mutual Funds) Regulations. Confirm the exact figures and the step-down above ₹10,000 crore against your workbook edition and the latest SEBI circulars. The 'Next ₹1,250 crore' slab is the band from ₹750 crore to ₹2,000 crore of assets. Apply each rate only to its own slice of assets. The reduction above ₹10,000 crore continues only down to 1.05%.
Other than equity-oriented schemes: First ₹500 crore: 2.00% | Next ₹250 crore: 1.75% | Next ₹1,250 crore: 1.50% | Next ₹3,000 crore: 1.35% | Next ₹5,000 crore: 1.25% | Above ₹10,000 crore: 0.05% lower for every ₹5,000 crore (or part) increase, down to a floor of 0.80%; Debt and other non-equity schemes sit 0.25% below the equity slab at each of the slabs shown. Above ₹10,000 crore the reduction continues only down to 0.80% for other schemes, against 1.05% for equity-oriented schemes. These figures follow the workbook edition. Verify the slabs and the floor against the current SEBI Regulations and circulars before the exam.
Other caps: Close-ended equity-oriented: 1.25% | Other close-ended: 1.00% | Index funds and exchange traded funds (other than gold ETFs): 1.00%; Gold ETFs and fund-of-funds have their own separate caps, which are not covered by the figures above. Check your workbook edition for those caps and other special cases, and for any recent revision to the figures shown here.
Additional expense for inflows beyond the top 30 cities: Additional expense allowed for inflows from retail investors coming from beyond the top 30 cities (B30), subject to the condition and rate in the current SEBI circulars and your workbook edition; This is additional to, not part of, the slab limit. Learn that it is not automatic. SEBI has revised how this expense is determined, and it is now tied to inflows. Check the exact condition and rate in your workbook edition and the latest SEBI circulars rather than relying on a fixed figure.
GST on management fee: GST on the management fee is charged over and above the base TER limit; GST applies to the management fee (the AMC's fee). It is not charged on brokerage. It sits outside the slab limit.
Brokerage and transaction costs: Brokerage and transaction costs allowed in addition to the base TER slab limits: up to 0.12% for cash market trades and up to 0.05% for derivatives trades; These are an additional expense over and above the base TER slab limits, not part of them. They are separate from GST. Do not mix them with the GST on the management fee.
Approximate net return: Net return ≈ Gross return − TER; A simple one-year approximation. Direct plan return exceeds regular plan return by about the TER gap.

How to solve Total Expense Ratio and Fund Expenses questions

Use the same sequence for every TER question, whether it is theory or numerical.

1Read the question and identify what is asked: a limit, a calculation, a plan comparison or an effect on returns.
2Identify the scheme type: equity-oriented, other than equity, index fund or ETF, or close-ended. This decides which cap applies.
3For numerical questions, split average net assets into slabs and apply each rate only to its own slice.
4Add the slab expenses and divide by total assets to get the effective TER. Check whether the question asks for the amount or the percentage.
5Check for additional charges in the question, such as GST or the extra 0.30% for beyond-top-30-city inflows. Add them only if the question mentions them.
6For plan comparison, remember direct has no distribution cost, so its TER is lower and its return is higher. Subtract the TER from the gross return for each plan.
7Check the final answer's unit (₹ crore, % or ₹) and then eliminate options that are clearly out of range.

Quickest way: Slice, multiply, add

When to use it: For slab-based TER calculations under time pressure.

Write the slab rates for the scheme type in a row.
Multiply each slice by its rate in ₹ crore, e.g. 500 × 2.25% = ₹11.25 crore.
Add the slices and divide by the total assets for the effective rate.
Sense check: the effective rate must lie between the highest and lowest slab rate used.
For plan questions, skip detail: net return ≈ gross return − TER, and the direct plan wins by the TER gap.

Common mistakes in Total Expense Ratio and Fund Expenses

Applying the top slab rate (2.25%) to the entire asset base.
Students read the rate as a flat cap rather than a rate on a slice.
Fix: Apply each rate only to its own slice of average net assets, then compute the effective rate.
Thinking TER is charged separately from the investor's account.
The word 'expense' suggests a bill or deduction from the investment.
Fix: Remember TER is accrued daily within the scheme and NAV is declared net of it. The investor pays no separate TER.
Believing direct and regular plans hold different portfolios.
The NAVs differ, so students assume the investments differ.
Fix: Both invest in the same portfolio. NAVs differ only because the regular plan's TER includes distribution cost.
Mixing up equity and non-equity slab rates.
The two tables look alike and differ by only 0.25% at each level.
Fix: Remember non-equity schemes have a lower cap at each slab. Check the scheme type before reading the rate.
Treating the additional 0.30% and GST as part of the base slab limit.
The word 'additional' is overlooked in the option text.
Fix: These are charged over and above the base limit and each has its own conditions.
Assuming a lower TER always means a better fund.
Students over-apply cost as the only test of quality.
Fix: TER is one factor. Compare it along with returns, risk and strategy, since a cheap fund can still underperform.

Worked examples

Example 1

An equity-oriented open-ended scheme has average weekly net assets of ₹1,000 crore. Using the SEBI base slabs, what is the maximum effective TER? (a) 2.25% (b) 2.00% (c) 2.0625% (d) 1.75%

Show the solution

The scheme is equity-oriented, so use the equity slab: first ₹500 crore at 2.25%, next ₹250 crore at 2.00%, next ₹1,250 crore at 1.75%.
Slice 1: ₹500 crore × 2.25% = ₹11.25 crore.
Slice 2: ₹250 crore × 2.00% = ₹5.00 crore.
Slice 3: the remaining assets are ₹1,000 − ₹750 = ₹250 crore, so ₹250 crore × 1.75% = ₹4.375 crore.
Total expense = 11.25 + 5.00 + 4.375 = ₹20.625 crore.
Effective TER = 20.625 ÷ 1,000 × 100 = 2.0625%.

Answer: (c) 2.0625%. Options (a), (b) and (d) apply a single slab rate to all assets.

Example 2

A regular plan has a TER of 1.80% and the direct plan of the same scheme has a TER of 0.90%. The portfolio earns a gross return of 12% in a year. Approximately how much more does an investor of ₹10,00,000 earn in the direct plan than in the regular plan? (a) ₹4,500 (b) ₹9,000 (c) ₹18,000 (d) ₹90,000

Show the solution

Both plans hold the same portfolio, so the gross return is 12% for both.
Regular plan net return ≈ 12% − 1.80% = 10.20%.
Direct plan net return ≈ 12% − 0.90% = 11.10%.
Difference ≈ 11.10% − 10.20% = 0.90%.
0.90% of ₹10,00,000 = ₹9,000.

Answer: (b) ₹9,000, using the simple one-year approximation. The gap equals the TER difference. Over longer periods compounding makes the gap larger.

Exam tips

Learn the equity and non-equity slab tables as a pair. Remember non-equity is 0.25% lower at each level, and practise one slice-by-slice calculation.
Watch for words like 'additional', 'over and above' and 'excluding'. They separate base TER from extra charges.
In plan comparison questions, first check whether the portfolio is the same. It is, so only the expense differs.
Do not guess on doubtful slab numbers where negative marking applies in your exam. Eliminate options that break the logic, such as non-equity limits above equity limits.
Before the exam, check the latest SEBI circulars and workbook edition for changes to expense rules.

Practice questions from Net Asset Value, Total Expense Ratio and Pricing of Units

Total Expense Ratio and Fund Expenses: frequently asked questions

What is TER in mutual funds?

Total Expense Ratio is the yearly cost of running a scheme, shown as a percentage of its average net assets. It covers the management fee, distribution cost and other permitted expenses. It is deducted daily, so NAV is already net of it.

What is the difference between direct and regular plan expense ratio?

A direct plan has no distributor commission, so its TER is lower. A regular plan includes distribution cost in its TER. Both plans hold the same portfolio, but the direct plan's NAV grows faster.

How does TER affect mutual fund returns?

A higher TER reduces the return the investor keeps. As a rough guide, net return is gross return minus TER. Over many years compounding makes even a small TER gap significant.

Does the SEBI TER limit change with fund size?

Yes. The cap is slab-based, and the rate falls as average net assets rise. Equity-oriented schemes have a higher cap than other schemes, and index funds, ETFs and close-ended schemes have separate caps.