Costs: Expense Ratio, Direct and Regular Plans, Exit Load
A scheme's running costs are charged inside its NAV as an expense ratio. This lesson explains the base and total expense ratios, how the direct and regular plans of a scheme differ, how an exit load works, and how a small cost difference compounds.
Base and total expense ratio
An investor in a mutual fund scheme is not sent a bill. The scheme's running costs are charged to the scheme and so are already reflected in its NAV. They are expressed as a percentage of the scheme's assets for a year, the expense ratio. Costs are charged whether markets rise or fall, and a small difference compounds over time, as the worked example shows.
Under the SEBI (Mutual Funds) Regulations, 2026 the base expense ratio (BER) covers the investment and advisory fee, recurring expenses such as registrar, custodian and audit fees, and distribution charges. SEBI caps the BER by slabs of the scheme's assets. The total expense ratio (TER) adds brokerage, transaction costs and statutory levies such as GST and securities transaction tax.
Direct plan and regular plan
Every scheme has a direct plan and a regular plan. Both hold the same portfolio. The regular plan is the one sold through distributors, and its base expense ratio includes the commission the fund house pays them. The direct plan carries no distribution commission.
For that reason the direct plan has a lower expense ratio and a separate, higher NAV than the regular plan of the same scheme. Performance disclosures state which plan is being shown. The half-yearly consolidated account statement shows the commission paid to the distributor in rupees and the scheme's average total expense ratio.
Exit load
An exit load, where a scheme has one, is deducted from the redemption price of units redeemed within a period the scheme states: redemption price = NAV × (1 − exit load). It cannot exceed 3% of NAV, and the load collected goes back into the scheme, net of GST. There is no entry load.
An exit load is not charged on bonus units, on units allotted when IDCW is reinvested, or on a switch between the regular and direct plans of the same scheme. A switch to a different scheme is a redemption, and each SIP instalment has its own load period, so those can attract the load.
Rules at a glance
An exit load on redemption (illustrative)
A scheme states an exit load of 1% on units redeemed within a year of allotment. An investor redeems 1,000 such units when the NAV is ₹50. Redemption price = 50 × (1 − 0.01) = ₹49.50, so the proceeds are 1,000 × 49.50 = ₹49,500.
The ₹500 deducted is not kept by the fund house; net of GST it goes back into the scheme. Had the same units been allotted as bonus units, no load would have applied.
A one-point difference in net growth over 10 years (illustrative)
- Assumptions, not forecasts: ₹5,00,000 goes into the direct plan and ₹5,00,000 into the regular plan of the same scheme. After expenses the direct plan grows at 9.5% a year and the regular plan at 8.5% a year, for 10 years. The growth factors are 2.478 and 2.261.
- Direct plan: 5,00,000 × 2.478 = ₹12,39,000.
- Regular plan: 5,00,000 × 2.261 = ₹11,30,500.
- Difference: 12,39,000 − 11,30,500 = ₹1,08,500.
- One percentage point on ₹5,00,000 is ₹5,000 in a year. Ten such years without compounding would be ₹50,000; compounding makes the gap ₹1,08,500.
Result. On these assumptions the gap after 10 years is ₹1,08,500. The one-point gap and both rates are assumptions for the arithmetic: actual gaps differ by scheme, and actual returns may be higher, lower or negative.
Key points
- Base expense ratio = investment and advisory fee + recurring expenses + distribution charges.
- Total expense ratio = base expense ratio + brokerage + transaction costs + statutory levies.
- The direct plan has the same portfolio as the regular plan but no distribution commission, so a lower expense ratio and a higher NAV.
- Exit load is deducted from the redemption price, within a cap of 3% of NAV; it is not charged on bonus units, reinvested-IDCW units or a switch between plans of the same scheme.
- Costs are charged whether markets rise or fall, and small differences compound over time.
Common misunderstandings
- The expense ratio is not billed separately: it is charged to the scheme and is already reflected in the NAV.
- The direct plan is not a different portfolio: it holds the same securities as the regular plan and differs in carrying no distribution commission.
- GST and brokerage are not inside the base expense ratio: they are added to it to arrive at the total expense ratio.
Questions people ask
Is distributor commission part of the base expense ratio?
Yes, in the regular plan. Distribution charges are one of the three components of the base expense ratio.
Why is the direct plan's NAV higher than the regular plan's?
The two plans hold the same portfolio, but the direct plan bears lower expenses because it carries no distribution commission, so more of the portfolio's value stays in its NAV.
Does moving from the regular plan to the direct plan of the same scheme attract exit load?
No. Exit load is not charged on a switch between the plans of the same scheme. A switch to a different scheme is a redemption and can attract it.
What this lesson relies on
- SEBI (Mutual Funds) Regulations, 2026, regulations 44(4), 66 and 67
- SEBI Master Circular for Mutual Funds, 20 March 2026 (exit load; consolidated account statement)
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.