Mutual Fund Expense Ratios: How SEBI's TER Slabs Cap What You Pay, From 2.25% Down to 1.05%

Every rupee a mutual fund keeps as its total expense ratio (TER) is a rupee that never compounds for you. Since SEBI's circular SEBI/HO/IMD/DF2/CIR/P/2018/137 dated 22 October 2018, the ceiling on that charge has been fixed by a sliding scale tied to a scheme's assets under management (AUM): 2.25% at the smallest end for open-ended equity funds, tapering to 1.05% once a scheme crosses Rs 50,000 crore. The cap sits under Regulation 52 of the SEBI (Mutual Funds) Regulations 1996.

This comparison pits the two plan variants of the same fund against each other: the Regular plan, sold through a distributor, and the Direct plan, bought straight from the asset management company (AMC). Both track the identical portfolio, but the Regular plan bakes a distributor commission into its TER, while the Direct plan strips it out. Over a 20-year goal, that single choice can move the final corpus by several lakh rupees, as the arithmetic below shows.

How SEBI's TER Slabs Work

The 22 October 2018 circular replaced a flat 2.50% cap with a tapering slab structure, so that costs fall as a scheme grows and captures economies of scale. For an open-ended equity scheme, the maximum TER is applied slab by slab on daily net assets:

Open-ended other-than-equity (debt) schemes sit 0.25 percentage points lower at every slab, so the same structure runs from 2.00% down to 0.80%. Three add-ons sit on top of these ceilings. AMCs may charge up to 30 basis points (0.30%) of additional TER for inflows sourced from beyond the top-30 cities (the B30 concession), provided those inflows meet the circular's threshold; up to 2 basis points (0.02%) is set aside annually for investor education; and goods and services tax (GST) on the AMC's investment-management fee can be levied over and above the slab limit. A fund holding Rs 3,000 crore, therefore, blends the 2.25%, 2.00% and part of the 1.75% slabs into a single published number, which is why two equity funds of different sizes rarely quote the same TER.

The design deliberately rewards scale: as a scheme's assets under management climb, its blended TER should fall, and SEBI's structure tolerates no reversal of that trend within the slabs. One cost sits outside the TER entirely, however. Brokerage and transaction charges on the fund's own securities trades are permitted over and above the slab cap, subject to their own limits under the 2018 circular, so a very high-churn scheme can quietly cost more than its headline TER suggests. This is why comparing the published expense ratio alone is necessary but not sufficient; the fund's portfolio turnover ratio, disclosed in its monthly factsheet, tells you how much trading friction sits behind the number.

Side-by-Side Comparison

SEBI made Direct plans compulsory from 1 January 2013 under Regulation 52(6A). A Direct plan must carry a lower expense ratio than its Regular twin because it excludes distribution expenses, commission and any transaction charges paid to intermediaries. The portfolio, fund manager and mandate are identical; only the cost layer and, consequently, the net asset value (NAV) differ.

The gap between the two TERs is, in effect, the price of advice and hand-holding. On a large-cap equity fund that gap often sits near 1.0 percentage point; on smaller or more actively marketed schemes it can be wider. To see what one percentage point does over a working lifetime, consider a one-time Rs 10 lakh investment held for 20 years. The table below assumes a constant 11% gross annual return purely to isolate the cost drag — it is illustrative arithmetic on expenses, not a forecast of any scheme's performance, and actual returns will vary.

The Direct plan ends roughly Rs 12.3 lakh ahead on the same Rs 10 lakh, from nothing more than a one percentage-point difference in TER. You can model your own numbers with our SIP calculator or lumpsum calculator, and read the plain-English definition in the expense ratio glossary entry. The TER is deducted from NAV every business day, so the drag is silent — you never see a debit, only a marginally lower NAV. That daily deduction is precisely how the cost stays invisible; the published net asset value already has the day's expense subtracted, which is why a Direct plan's NAV runs visibly higher than its Regular twin's over time even though both hold the same stocks.

Tax Treatment

TER and tax are separate levers, but the two products carry very different tax profiles once you redeem. Because the expense ratio is netted off the NAV daily, a higher TER slightly lowers your eventual capital gain, and therefore your tax — but that is a trivial saving compared with the compounding it costs you, so it is never a reason to prefer a costlier plan.

For an equity-oriented fund (at least 65% in Indian equity), gains follow Sections 111A and 112A of the Income-tax Act as amended by Budget 2024, effective 23 July 2024:

The Rs 1.25 lakh annual LTCG exemption applies across all your equity funds and listed shares combined, not per scheme. Debt and other "specified" mutual funds bought on or after 1 April 2023 are treated differently: under Section 50AA, inserted by the Finance Act 2023, the entire gain is taxed at your slab rate irrespective of holding period, with no long-term concession and no indexation. A debt fund therefore offers no LTCG advantage, so the fund's TER matters even more, since it eats into a fully taxable return. The distinction between a Direct and Regular plan has no bearing on tax — both variants of the same equity fund attract the identical 12.5% LTCG rate. See the LTCG glossary entry for the statutory detail.

Who Should Pick Which

The right variant depends less on the TER number and more on whether you need a human in the loop. Use the profiles below as a guide, not a rule.

• The self-directed investor who is comfortable comparing schemes, reading factsheets and rebalancing should default to Direct plans. The saved 0.5 to 1.0 percentage point of TER compounds entirely in their favour, and platforms such as the AMC's own site or SEBI-registered RTAs charge nothing to transact.
• The advice-seeker who wants a portfolio built and monitored is often better served by a Direct plan combined with a fee-only SEBI Registered Investment Adviser (RIA), paying a transparent, flat advisory fee rather than an embedded trail commission that scales with AUM forever.
• The behaviour-prone investor who has historically panic-sold in drawdowns may genuinely earn back the Regular plan's higher TER if a good distributor stops them from exiting at the bottom. Discipline, in that case, can be worth more than the 1 percentage point of cost.
• The B30 investor in a smaller town should note that funds may carry up to 30 basis points of extra TER on B30 inflows under the 2018 circular; this is a structural cost of the scheme, not of the plan you choose, and applies to both variants.

Whatever the profile, size the goal first. Our ELSS calculator helps tax-savers weigh the Section 80C angle, and the recent explainers on flexi cap funds and the 65% equity floor and the multi cap 25/25/25 rule show how the same TER slabs apply once you pick a category. For definitions of the market-cap bands that drive those categories, our note on how SEBI defines large, mid and small cap sets out the 1st-100th, 101st-250th and 251st-onwards rule.

FAQ

What is the maximum TER a mutual fund can charge in India?

For an open-ended equity scheme, the ceiling ranges from 2.25% on the first Rs 500 crore of AUM down to 1.05% on assets above Rs 50,000 crore, per SEBI circular SEBI/HO/IMD/DF2/CIR/P/2018/137 dated 22 October 2018. Debt schemes sit 0.25 percentage points lower at each slab, from 2.00% to 0.80%.

Why is a Direct plan's expense ratio lower than a Regular plan's?

Because SEBI's Regulation 52(6A) requires a Direct plan to exclude distribution expenses, commission and intermediary transaction charges. The Regular plan of the same fund embeds a trail commission for the distributor, so its TER — and its drag on NAV — is higher, typically by 0.5 to 1.0 percentage point on equity funds.

Does a lower TER guarantee higher returns?

Not on its own. TER guarantees only a lower cost; the gross return still depends on the fund manager and the market. But between two identical portfolios — a Direct and a Regular plan of one scheme — the lower-TER Direct plan will always deliver the higher net return, because the underlying investments are the same.

What is the B30 additional TER?

The 2018 circular lets AMCs charge up to 30 basis points (0.30%) of extra TER on inflows from beyond the top-30 cities, to encourage mutual-fund penetration in smaller towns. It is clawed back if that money is redeemed early and applies to the scheme, not to your choice of Direct versus Regular plan.

Are index funds and ETFs subject to the same slabs?

No. SEBI sets a separate, lower ceiling for passive products: index funds and exchange-traded funds are capped at 1.00% of daily net assets under the same 2018 circular, which is one reason passive vehicles are usually the cheapest way to hold the market.

How does TER affect my tax?

Only indirectly. The TER is deducted from NAV daily, so a higher expense ratio marginally lowers your capital gain and hence your tax — but the compounding you lose far outweighs any tax saved. Your LTCG rate of 12.5% (above Rs 1.25 lakh) under Section 112A is the same whichever plan you hold.

Where can I find a fund's current TER?

Every AMC must disclose the daily TER of each scheme and plan on its website and on the AMFI portal, updated whenever it changes. Always check the figure for the specific plan — Direct or Regular — before you invest, because the two can differ by a full percentage point.