6B.3 What it costs: TER, loads, direct versus regular

6B.3.1The 2026 expense structure#

Under the 2026 Regulations the scheme may be charged the investment management and advisory fee (Regulation 66(4)) and listed recurring expenses (66(5)): distribution commission, brokerage, registrar, trustee, audit and custodian fees, investor communication, and so on. Their total, excluding statutory levies and exchange transaction costs, is the base expense ratio (BER), which is capped (66(7)) [V]. Four pieces make up what the investor pays (Regulation 67(1)) [V]:

• Brokerage for executing trades may be charged on top of the BER up to 0.06% of trade value in the cash market and 0.02% in derivatives; brokerage above those limits must come out of the BER (66(9)) [V]. Under the 1996 rules the corresponding caps were reported as 12 bp and 5 bp¹.
• Transaction costs are regulatory levies and exchange, clearing-corporation and clearing-house charges, outside the BER (66(10)) [V].
• Statutory levies ("levy imposed by state government and central government", Regulation 2(1)(yy)): GST on the fees, STT and stamp duty on the scheme's trades, charged at actuals [V].
• No other charges may be levied on investors, except exit load (Regulation 67(2)) [V]. The additional 0.05% that the 1996 Regulations allowed some schemes to charge was not carried over; SEBI described it as transitory².

Table 6B.1. Maximum base expense ratio, open-ended schemes, by slab of daily net assets (Regulation 66(7)(c); in force from 1 Apr 2026) [V].

Slab of daily net assets	Equity-oriented	Other schemes
First ₹500 cr	2.10%	1.85%
Next ₹250 cr	1.90%	1.65%
Next ₹1,250 cr	1.60%	1.40%
Next ₹3,000 cr	1.50%	1.25%
Next ₹5,000 cr	1.40%	1.15%
Next ₹40,000 cr	falls by 0.05% for every ₹5,000 cr or part	same rule
Balance (above ₹50,000 cr)	0.95%	0.70%

Other caps (Regulation 66(7)(a)–(b)) [V]: index funds and ETFs 0.90%; FoFs investing in liquid schemes, index funds and ETFs 0.90% (including the underlying schemes' weighted expense ratio); FoFs with at least 65% in equity-oriented schemes 2.10%; other FoFs 1.85%; close-ended equity-oriented schemes 1.00% and other close-ended schemes 0.80%. A proviso allows schemes that charge a performance-linked BER, under a structure SEBI specifies. The slabs apply to the whole scheme's daily net assets, so a large scheme's blended cap is well below 2.10%; most actual TERs sit below their caps. Because statutory levies now sit outside the cap, old and new caps are not like-for-like: the index-fund cap moved from 1.00% including levies to 0.90% excluding them³.

Direct and regular plans Every scheme has a direct plan, bought from the AMC with no distributor, and a regular plan, bought through a distributor. Same portfolio, same manager; the regular plan's expense ratio is higher by the distributor's commission, which is paid out of the scheme's expenses as a trail (a percentage of the investor's current holding, paid for as long as it is held). Direct plans have been mandatory since 1 Jan 2013 (SEBI circular of 13 Sep 2012) [S]. Since SEBI's circular of 22 Oct 2018 (SEBI/HO/IMD/DF2/CIR/P/2018/137) commissions must follow a "full trail model": no upfront commission, with a narrow exception for small SIPs of first-time investors (upfronting of trail up to 1% a year for up to three years, revised in 2019 to SIPs of up to ₹3,000 a month), and all scheme-related expenses, including commission, must be paid from the scheme within the TER limits, not from the AMC's own books⁴.

6B.3.2The arithmetic of fee drag#

Proof

(6B.7) is the ratio of $W_0(1 + r - c_1)^T$ to $W_0(1 + r - c_2)^T$. Write $x = \Delta c/(1 + r - c_2) \in (0, 1)$, so $\rho_T = (1 - x)^T$. For $x \in (0,1)$, $-x/(1-x) \le \ln(1 - x) \le -x$ (the right inequality is concavity of $\ln$; the left is the right one applied to $1/(1-x) = 1 + x/(1-x)$, since $\ln(1 + y) \le y$). Multiply by $T$, exponentiate, and note $x/(1 - x) = \Delta c/(1 + r - c_1)$. The continuous case is $e^{(\mu - c_1)T}/e^{(\mu - c_2)T}$.∎

So a fee gap of $\Delta c$ costs a fraction of about $1 - e^{-T\Delta c/(1 + r)}$ of terminal wealth: one percentage point over twenty years at 12% costs about 16%, not 1% and not 20%. The cost is independent of the starting amount.

Proof

The instalment made $m$ months before the valuation grows to $P g_j^m$, so $FV_j = P\sum_{m=1}^n g_j^m$. Then $FV_1 = P\sum_m g_2^m \gamma^m = FV_2 \sum_m \omega_m\gamma^m$ with weights $\omega_m \ge 0$ summing to 1. Since $\gamma^m$ decreases in $m$, the average lies strictly between its smallest value $\gamma^n$ and its largest $\gamma$.∎

6B.3.3Loads, stamp duty, STT and costs outside the TER#

• Exit load. A charge on redemption within a stated period, typically 1% within a year for equity schemes. It must be credited to the scheme, not kept by the AMC, and cannot exceed 3% of NAV (Regulation 44(3)–(4)) [V]. It is paid by the leaver to the stayers, so it is a deterrent to short-term flows, much like a swing price. Entry loads were abolished in 2009 [S].
• Stamp duty of 0.005% applies to purchases of mutual fund units (including switch-ins and reinvested IDCW) since 1 Jul 2020⁶. Units allotted are $S(1 - 0.00005)/\text{NAV}$.
• STT of 0.001% of the redemption value is paid by the seller when units of an equity-oriented scheme are sold back to the fund⁷. ETF units bought and sold on the exchange carry exchange-trade charges instead (6B.9).
• Costs outside the TER. The fund's own trading costs (bid–ask spread and market impact on its trades) never appear in the TER; they show up only as a lower gross return. A fund with annual portfolio turnover $\tau$ (purchases or sales over average assets) and one-way cost $\kappa$ loses about $2\tau\kappa$ a year: 80% turnover at 0.25% one way is 0.40% a year, comparable to the TER of a direct equity plan. Factsheets report the portfolio turnover ratio; read it.

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