What Is Total Expense Ratio?

In April 2025, Securities Exchange Board of India (Sebi) chief Tuhin Kanta Pandey said they are unlikely to look into the rationalisation of the total expense ratio (TER) of mutual funds. Pandey said while rationalisation of expense ratios is not currently on Sebi’s list, it plans to simplify regulations to achieve ‘optimum regulation’.

Earlier in 2022, Sebi began to re-assess the expenses, charged by fund houses to investors following which a discussion paper for the same was released in May 2023. However, further discussions remained inconclusive as the previous Sebi Chairperson, Madhabi Puri Buch, said a second discussion paper would be released later. So far no such paper has been released.

What Is This Ratio?

• The total expense ratio or TER is a fee which fund houses charge investors for managing mutual fund schemes and exchange-traded funds (ETFs).

• It is calculated as a percentage of the scheme’s average net asset value (NAV).

• The daily NAV of any mutual fund is disclosed only after the amount calculated in the form of the expense ratio is deducted.

• Mutual funds have to mandatorily disclose the expense ratio of all schemes on their websites and the Association of Mutual Funds of India (Amfi) website daily.

• Expense ratios were formally incorporated in 1996 as a part of the the Sebi (Mutual Funds) Regulations 1996.

How Is It Calculated?

• TER is calculated by dividing a fund’s total operating costs by the average net assets under management (AUM) and multiplying it by 100.

• The ratio is then deducted from the NAV on a daily basis. So, if TER is 0.5 per cent, you will pay `50 for every `10,000 invested.

• TERs are inversely affected by the size of the respective mutual fund scheme. Typically, bigger funds have lower TER and vice-versa.

• Amfi’s website mandates fund houses to follow a slab-based system for TER on open-ended schemes.

• For equity funds, the maximum TER threshold is 2.5 per cent, for debt funds it’s 2 per cent, and for ETFs, it is 1 per cent.

How Does It Affect You?

• The concept of TER was introduced to increase the transparency and show investors how much of their returns are being used for meeting the fund’s operational expenses such as marketing and distribution fee and custodian fee etc.

• As expense ratio is subtracted from your annual returns, a high expense ratio is likely to dent your return on investment.

• On the other hand, a low-expense ratio can result in a higher NAV and potentially improve long-term returns.

• Expense ratios are one of the important factors for investors to check. However, it should not be the only reason for choosing a fund, as funds with lower TER do not necessarily give better returns.