Total Expense Ratio (TER) — Direct vs Regular Plans
The total expense ratio (TER) is the yearly cost charged to a scheme as a percentage of its net assets. This lesson explains the base expense ratio and what sits outside it, the caps under the 2026 Regulations, and why direct and regular plans have different NAVs.
What the TER is and how it is charged
Running a scheme costs money: managing the portfolio, keeping investor records, holding the securities, audit, marketing and distribution. These costs are charged to the scheme and expressed as a percentage of its net assets a year. That figure is the total expense ratio.
Expenses are accrued every day in proportion to the annual rate and charged to the scheme's assets, so the published NAV is already net of them. Investors receive no separate bill; the cost shows up as a slightly lower NAV each day.
The base expense ratio and what sits outside it
Under the SEBI (Mutual Funds) Regulations, 2026, in force from 1 April 2026, TER = base expense ratio (BER) + brokerage + transaction cost + statutory levies. The BER covers the investment and advisory fee, listed recurring expenses such as registrar, custodian, audit and marketing costs, and distribution charges.
The BER excludes statutory levies such as GST, and it excludes brokerage and transaction costs; these are charged in addition. Brokerage outside the BER is limited to 0.06% of trade value in the cash market and 0.02% in derivatives. Only these items and exit load may be charged to investors. Exit load is not part of the TER, and entry load no longer exists.
The caps
The BER is capped in slabs that fall as a scheme grows. For open-ended schemes the cap is 2.10% for equity schemes and 1.85% for other schemes on the first ₹500 crore of assets, stepping down to 0.95% and 0.70% on the last slab. Index funds and ETFs are capped at 0.90%, and close-ended schemes at 1.00% (equity) or 0.80% (other).
These are ceilings; what a scheme actually charges is disclosed. The earlier extra 0.30% for inflows from smaller (B30) cities was removed on 31 October 2025 and no longer exists.
Direct and regular plans
Schemes offer a regular plan and a direct plan; direct plans have been compulsory for every scheme since 1 January 2013. The two share the same portfolio. The regular plan's expenses include the commission paid to the distributor, while the direct plan carries no distribution commission.
The direct plan therefore has a lower expense ratio and a separate, higher NAV. The half-yearly consolidated account statement shows the commission paid to the distributor in rupees and the scheme's average total expense ratio.
Rules at a glance
A yearly rate becomes a daily charge (illustrative, assumed rates)
Assume a scheme's regular plan has total expenses of 1.46% a year and its direct plan 0.73% a year. On ₹1,00,000 of assets the regular plan's expenses are ₹1,460 a year, or ₹1,460 ÷ 365 = ₹4 a day. The direct plan's are ₹730 a year, or ₹730 ÷ 365 = ₹2 a day.
Nobody is billed these amounts: each day's NAV is struck after deducting them. The gap mainly represents the distribution commission paid in the regular plan, which is why the direct plan's NAV stands above the regular plan's although both hold the same portfolio.
The blended BER cap for an equity scheme (assumed size)
- Assume an open-ended equity scheme has net assets of ₹1,000 crore. The caps apply slab by slab.
- First ₹500 crore at 2.10% = ₹10.50 crore.
- Next ₹250 crore at 1.90% = ₹4.75 crore.
- The remaining ₹250 crore falls in the next slab, at 1.60% = ₹4.00 crore.
- Total = ₹10.50 crore + ₹4.75 crore + ₹4.00 crore = ₹19.25 crore. As a share of net assets: ₹19.25 crore ÷ ₹1,000 crore = 1.925%.
Result. The highest base expense ratio this scheme could charge is 1.925% a year. Brokerage, transaction costs and statutory levies come on top, and a scheme may charge less than its ceiling.
Key points
- Since 1 April 2026: TER = base expense ratio + brokerage + transaction cost + statutory levies.
- The BER covers the investment and advisory fee, listed recurring expenses and distribution charges; it excludes statutory levies, brokerage and transaction costs.
- BER caps for open-ended schemes fall as assets grow, from 2.10% (equity) or 1.85% (other) on the first ₹500 crore to 0.95% or 0.70% on the last slab.
- The BER cap for index funds and ETFs is 0.90%.
- A direct plan carries no distribution commission, so it has a lower expense ratio and a higher NAV; the portfolio is the same.
- Expenses are accrued daily and reflected in the NAV.
Common misunderstandings
- The TER is not billed to investors separately: it is accrued daily and reflected in the NAV.
- The base expense ratio is not the whole cost: brokerage, transaction costs and statutory levies such as GST are charged in addition.
- The B30 allowance is not a current rule: the extra 0.30% was removed on 31 October 2025.
Questions people ask
Is exit load part of the TER?
No. The TER is the base expense ratio plus brokerage, transaction cost and statutory levies. Exit load is a separate charge on redemption.
How does the cap for index funds and ETFs compare with that for actively managed equity schemes?
The base expense ratio of index funds and ETFs is capped at 0.90%. That is lower than the 2.10% cap on the first ₹500 crore of an actively managed open-ended equity scheme. Other scheme types and slabs have their own caps.
Where can an investor see what the distributor was paid?
In the half-yearly consolidated account statement, which shows the commission paid to the distributor in rupees and the scheme's average total expense ratio.
What this lesson relies on
- SEBI (Mutual Funds) Regulations, 2026 — Regulations 66 and 67 (expenses), in force 1 April 2026
- SEBI Master Circular for Mutual Funds (20 March 2026) — consolidated account statement disclosures
This lesson was reviewed independently against these sources on 8 October 2026. Rules change: check the current regulation, scheme document or policy wording before relying on any figure. This is education, not advice.