The expense ratio in mutual funds represents the annual ongoing charge deducted from a scheme’s assets to cover operational costs. This charge is expressed as a percentage of the scheme’s daily net assets and is reflected in the Net Asset Value (NAV).
This is general educational content only, not personalised investment advice. Consult a SEBI-registered investment adviser.
A common misunderstanding is that all mutual fund charges are hidden within one figure. In reality, the Total Expense Ratio (TER) has traditionally bundled various costs, but SEBI’s recent changes introduce greater separation for clarity. One key nuance is the shift to a Base Expense Ratio (BER) structure, where certain statutory levies are now excluded from the capped portion. These changes were approved on December 17, 2025.
Many Indian households compare mutual funds to familiar options like fixed deposits or gold, where returns appear straightforward without visible ongoing deductions. In mutual funds, however, the expense ratio is deducted each day silently from the NAV, similar to how small daily contributions maintain shared facilities.
The expense ratio is like the maintenance charge in a housing society – a small daily contribution from all residents that covers management, security, and upkeep, deducted silently to keep the society running smoothly. This helps ensure the common areas remain functional, but the amount varies based on the society’s size and needs.
SEBI’s BER framework separates core fees from statutory levies for transparency.
What is Total Expense Ratio (TER)?
The Total Expense Ratio (TER) is the complete annual cost borne by investors in a mutual fund scheme, expressed as a percentage of the scheme’s average daily net assets.
It includes all recurring expenses related to managing and operating the scheme. These costs are deducted daily from the scheme’s assets, which reduces the NAV proportionally each day.
In Indian mutual funds, under the updated framework, the TER comprises the Base Expense Ratio (BER) plus brokerage and statutory/regulatory levies charged separately on actuals.
The TER is disclosed daily by mutual fund houses and on platforms like AMFI.
Evolution to SEBI’s Base Expense Ratio (BER) Framework (2025 Changes)
SEBI approved revisions to the expense ratio framework on December 17, 2025.
The capped portion is now termed Base Expense Ratio (BER), covering core operational fees charged by the asset management company (AMC).
Statutory and regulatory levies – such as GST, Securities Transaction Tax (STT), stamp duty, and exchange fees – are excluded from the BER cap and charged separately on actuals.
This separation exists because statutory levies are government-mandated and subject to policy changes, while core fees are within AMC control. Excluding them provides clearer visibility into fund house charges versus external mandates.
Maximum BER limits have been adjusted downward across slabs.
A Relatable Indian Analogy: The Housing Society Maintenance
In many Indian housing societies, residents pay a monthly maintenance charge that covers security, cleaning, lifts, and common area upkeep. This charge is collected from all flats and deducted regularly.
Larger societies with more residents often have lower per-flat charges because fixed costs are spread over a bigger base – similar to how larger mutual fund schemes operate under lower percentage caps due to scale.
However, additional government levies like property taxes are sometimes billed separately. SEBI’s BER framework follows a similar logic: core maintenance (BER) is capped transparently, while external levies are shown separately.
This analogy illustrates how shared costs support operations, with amounts depending on scale and regulatory boundaries.
Components Included in BER vs Excluded Statutory Levies
The BER includes expenses directly related to scheme management:
- Fund management and advisory fees
- Distribution and commission expenses
- Registrar and transfer agent (RTA) charges
- Administrative and operational costs
- Custodian and audit fees
Excluded from BER (charged separately on actuals):
- Goods and Services Tax (GST) on management fees
- Securities Transaction Tax (STT) and Commodity Transaction Tax (CTT)
- Stamp duty on transactions
- SEBI regulatory fees and exchange charges
Contrast Table: Components in the BER Framework
| Category | Included in BER | Excluded (Charged Separately) |
|---|---|---|
| Core Management Fees | Yes (e.g., fund manager’s fee) | No |
| Distribution Commissions | Yes | No |
| Operational Expenses | Yes (RTA, audit, etc.) | No |
| GST on Fees | No | Yes |
| Transaction Taxes (STT, Stamp Duty) | No | Yes |
| Regulatory/Exchange Fees | No | Yes |
This table clarifies the separation between controllable and mandatory costs.
For example, in an equity scheme, management fees fall under BER limits, while STT on share trades and GST are added based on actual activity.
How Expense Ratios Are Calculated and Deducted Daily
Expense ratios are calculated based on the scheme’s total allowable expenses divided by its average AUM.
The process follows these steps:
- The AMC applies the daily portion of the applicable BER.
- Brokerage and statutory levies are added on actuals.
- This total amount is deducted from the scheme’s assets.
- The adjusted figure determines the daily NAV.
- The effective ratio is reviewed and disclosed periodically.
Deduction occurs automatically – investors see only the net NAV. For instance, a 1% annual cost equates to roughly 0.0027% daily reduction.
This daily mechanism maintains smooth operations.
AUM-Based Slab Limits Under BER
SEBI sets maximum BER limits on a slab basis for open-ended active schemes (other than index funds and FoFs), decreasing as AUM grows to reflect economies of scale.
Contrast Table: Maximum BER Limits for Open-Ended Active Schemes
| AUM Slab (₹ crore) | Equity-Oriented Schemes (%) | Other Than Equity-Oriented Schemes (%) |
|---|---|---|
| First ₹500 | 2.10 | 1.85 |
| Next ₹250 | 1.90 | 1.65 |
| Next ₹1,250 | 1.60 | 1.35 |
| Next ₹3,000 | 1.45 | 1.25 |
| Next ₹5,000 | 1.35 | 1.15 |
| Next ₹40,000 | Reduction of 0.05% for every increase of ₹5,000 crore or part thereof | Reduction of 0.05% for every increase of ₹5,000 crore or part thereof |
| Balance above | 0.90 | 0.70 |
Index Funds/ETFs and Fund of Funds Limits
- Index Funds/ETFs: Maximum BER 0.85%
- Fund of Funds (investing in liquid/index/ETFs): 0.85%
- Fund of Funds (at least 65% in equity-oriented): 2.10%
- Other Fund of Funds: 1.85%
AMCs may charge below these maxima. The exact application follows SEBI guidelines.
Long-Term Impact of Expense Ratios on Investments
Ongoing deductions affect compounding over time in market-linked schemes.
In Indian conditions with periodic volatility, small ratio differences can accumulate noticeably over years, similar to how minor variations in fixed deposit rates impact maturity amounts.
Many households value steady growth in PPF or real estate – mutual funds involve market exposure alongside these structural costs.
SEBI’s framework ensures transparent disclosure of these boundaries.
Key Limitations and Risks to Understand
Mutual fund investments carry market risks, and there are no guarantees of returns.
The expense ratio, whether TER or BER components, does not protect against capital loss – it covers only operational costs.
Regulation provides transparency and caps on core fees, but not immunity from market fluctuations or levy changes.
Investors must verify current details from official sources and consult certified advisors.
Frequently Asked Questions
What is the difference between TER and BER in 2025?
TER represents the full cost (BER + brokerage + statutory levies), while BER is the capped core operational fee excluding items like GST and STT.
What components are included in the expense ratio?
BER covers management fees, commissions, and operational costs; statutory levies are separate.
How does the expense ratio get deducted?
It is reduced daily from NAV, affecting the unit value proportionally.
Is GST on mutual funds charged separately now?
Yes, GST is excluded from BER and added on actuals.
Does a lower expense ratio mean better returns?
Lower costs allow greater compounding potential, but outcomes depend on market performance.
How do slab limits work under BER?
Limits reduce progressively with higher AUM, with separate structures for active equity, debt, index, and FoF schemes.
Key Takeaways
- Expense ratios cover ongoing costs, deducted daily via NAV adjustments.
- SEBI’s BER framework separates core fees from statutory levies for better clarity.
- Slab-based limits reflect scale, with reductions across categories.
- These are transparent charges unrelated to return guarantees.
Related Reading
- To review solution-oriented variants, revisit Solution-Oriented Funds (Retirement & Children’s)
- If transaction costs concern you, see Transaction Charges, Exit Loads and Other Costs
Have you faced any confusion while exploring this topic? Share your questions in the comments below—we read them all.
