NISM Series V-A · Quick reference
Expense Ratio FAQs — every question NISM aspirants and Indian investors actually ask
15 plain-English answers covering how TER is calculated, what it includes and excludes, how SEBI caps work, the GST treatment, B-30 incentives, Direct vs Regular maths, and what changes when AUM grows. Built for the NISM Series V-A syllabus and for retail investors comparing schemes.
The basics
What is the expense ratio in simple terms?
It is the annual cost of running a mutual fund scheme, expressed as a percentage of the scheme's average daily Assets Under Management (AUM). A scheme with a 1.5% TER charges ₹1,500 per year, on average, for every ₹1,00,000 of investor money it manages — covering everything from the fund manager's salary to GST.
How is the expense ratio calculated?
TER (%) = (Total recurring expenses ÷ Average daily net assets) × 100. "Total recurring expenses" includes the investment management fee, RTA charges, trustee and audit fees, custodian fees, distribution commission (Regular plans only), B-30 marketing incentive if applicable, and GST on all of these. SEBI prescribes the maximum allowable figure under Regulation 52 of the SEBI (Mutual Funds) Regulations, 1996.
On what base is it charged — my investment, NAV, or AUM?
On the scheme's average daily net assets (i.e., average daily AUM). Not on your investment amount. Not on the day's NAV. This is a common NISM exam trap.
Do I pay TER as a separate fee?
No. The AMC deducts 1/365th of the annual TER from the scheme's AUM each business day. The NAV you see at end-of-day is already net of that day's slice. You never see a separate "fees" line item on your account statement.
Is GST included in the published TER or charged on top?
Included. By SEBI mandate, the published TER figure is GST-inclusive. If a fund discloses "TER 1.85%", that figure already contains the GST on management fees, distribution costs, and every other component. There is no additional GST charge on top.
SEBI caps and the AUM slabs
Does SEBI cap the maximum expense ratio?
Yes — under Regulation 52, amended materially in October 2018. The cap is tiered by scheme AUM and asset class. For equity schemes the caps range from 2.25% (sub-₹500 cr AUM) to 1.05% (above ₹50,000 cr AUM). Debt schemes are capped slightly lower at each slab.
Why does the cap drop as the AUM grows?
Economies of scale. Running a ₹100 cr fund and a ₹10,000 cr fund costs roughly the same in absolute rupees — the latter does not need 100x the back-office. SEBI's view is that those economies should flow back to investors as a lower fee, not stay with the AMC as a higher margin.
What is the B-30 incentive?
SEBI allows AMCs to charge an additional 30 bps on top of the standard cap if a defined fraction of fresh inflows comes from "B-30" cities — i.e., outside the top 30 Indian cities (Mumbai, Delhi, Bengaluru, etc.). This is meant to subsidise the higher cost of reaching small-town investors. The additional 30 bps comes off if inflows shift back to T-30.
Are brokerage and STT on the underlying portfolio inside the TER?
No. Trading costs on the portfolio — broker commission, STT, exchange transaction charges, GST on brokerage — are not part of the TER. They are embedded inside the NAV (i.e., they reduce returns) but are separately disclosed in the half-yearly portfolio statement. A high-turnover fund can cost 30–60 bps a year in these "hidden" costs that don't show up in the headline TER.
Direct vs Regular plan
Why is the Direct plan's TER lower than the Regular plan's?
Because the Regular plan TER includes the trail commission paid to the distributor who sold you the fund. The Direct plan is sold directly by the AMC, with no distributor in the chain, so that entire slice (typically 50–80 bps for equity) is missing. SEBI mandates that the Direct plan's TER must be strictly lower than the corresponding Regular plan's.
Is the underlying portfolio different in Direct vs Regular?
No — it is the same fund, the same portfolio, the same fund manager. The only difference is the cost structure and therefore the NAV. The Direct plan's NAV will always be higher than the Regular plan's NAV for the same scheme.
Can I switch from Regular to Direct?
Yes — but it is treated as a redemption from the Regular plan and a fresh purchase in the Direct plan. That triggers capital gains tax (STCG if held under 12 months for equity, LTCG above ₹1 lakh otherwise) and may attract an exit load. Worth doing for long-horizon investors; calculate the break-even.
The maths and the long-term impact
How much does a 1% difference in TER actually cost over the long run?
Far more than 1%. A ₹10 lakh lumpsum growing at 12% pre-fee CAGR for 25 years ends at ₹1.36 cr in a 1% TER fund vs ₹1.08 cr in a 2% TER fund — a ₹27.5 lakh gap, or roughly 25% of terminal wealth. The longer the horizon, the more lopsided the gap because fees compound against you the same way returns compound for you.
Does a lower TER guarantee better returns?
No. A lower TER is a tailwind, but fund selection still matters. A 1.5% TER active fund that consistently beats its benchmark by 2% is better than a 0.5% TER passive fund — if that outperformance is real and durable. For most retail investors over 10+ year horizons, the empirical answer is that low-cost index funds win more often than not.
How often does the TER change?
AMCs can revise the TER any time within the SEBI cap, subject to disclosure. In practice the TER drifts down as AUM grows past the cap thresholds — but it can also drift up if the fund shrinks or costs rise. Material changes must be disclosed via an addendum on the AMC's website.
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