What it costs

You never receive an invoice from a mutual fund. The cost is taken out of the portfolio before the NAV is published, every single day. That is convenient and it is also why almost nobody knows what they pay.

The expense ratio

SEBI's definition:

Expense ratio represents the annual fund operating expenses of a scheme, expressed as a percentage of the fund's daily net assets.

An expense ratio of 1% means 1% of the fund's assets is used to cover expenses over a year — management fees, administration, marketing, registrar costs. It is charged in daily slices against the daily net assets, which is why the NAV you see is already net of it.

One feature worth knowing:

Currently, in India, the expense ratio is fungible, i.e., there is no limit on any particular type of allowed expense as long as the total expense ratio is within the prescribed limit.

The fund can divide the total between management fee, marketing and administration however it likes. Only the total is capped. So there is no point asking what portion is the manager's fee — the number that binds is the one number.

The cap falls as the fund grows

Here is the rule most investors have never seen. Regulation 52(6)(c) caps total expenses on a sliding scale, and the scale is by fund size:

Slab of daily net assets	Maximum TER
First ₹500 crore	2.25%
Next ₹250 crore	2.00%
Next ₹1,250 crore	1.75%
Next ₹3,000 crore	1.60%
Next ₹5,000 crore	1.50%
Next ₹40,000 crore	falls 0.05% for every further ₹5,000 crore
Balance	1.05%

Read it the way a tax slab is read: the rates apply to each tranche, not to the whole fund. A scheme with ₹750 crore charges up to 2.25% on its first ₹500 crore and up to 2.00% on the next ₹250 crore, which blends to a limit a little under 2.17% — not 2.00%.

The consequence is that a large fund must be cheaper than a small one, as a matter of regulation rather than competition. A ₹50,000 crore scheme has a blended ceiling far below a ₹400 crore scheme's flat 2.25%.

Two adjustments sit on top:

• an additional 0.05% is permitted under Regulation 52(6A)(c) — but per SEBI's Master Circular of 27 June 2024, an AMC "shall not charge any additional expense of upto 0.05% ... if exit load is not being levied";
• brokerage costs, capped at 0.12% for cash market trades and 0.05% for derivatives.

These are caps, not the actual charge. The actual number is published daily by the AMC and by AMFI, and any change must be communicated at least three working days before it takes effect.

Direct and regular: the same scheme at two prices

Since 1 January 2013, SEBI has required every scheme to offer a direct plan for investments not routed through a distributor. SEBI:

Such direct plan has a lower expense ratio compared to regular plan as there is no distribution expenses and no commission is to be paid from such plans. The direct plan also has a separate NAV.

Same manager. Same portfolio. Same securities, bought at the same time in the same proportions. Two expense ratios, and therefore two NAVs that drift apart for ever.

The scheme document is explicit that the direct plan cannot be worse on any line: all fees and expenses in the direct plan, under every head including the management fee, "shall not exceed the fees and expenses charged under such heads in the regular Plan."

The scheme document's own illustration: a regular plan at 2% and a direct plan at 1%, on a gross return of 10%, return 8% and 9%. One percentage point, every year, on the whole balance — which chapter 10 works out over a holding period.

The regular plan is not a scam. The difference pays a distributor, and a distributor who gets you invested and stops you selling in a crash may be worth well over 1% a year. The question is whether you are getting that, or paying for a transaction that happened once.

Entry load is gone; exit load is not

SEBI abolished entry loads. Nothing is deducted when you invest.

Exit load is a charge on redeeming before a specified period, and SEBI states the purpose plainly: "to discourage short-term trading and to protect long-term investors from the potential adverse effects of short-term trading activities." It is a percentage of NAV. SEBI's worked example:

Suppose a mutual fund scheme charged exit load of 1% for redemption within 90 days from the date of purchase. Assume that you redeem 1000 units of a scheme before 90 days of purchase and NAV per unit is INR 50. The exit load will be = 1% X 1000 X INR 50 = INR 500.

You receive ₹49,500 rather than ₹50,000.

A fund cannot raise the exit load beyond what its offer document says, and any change applies only to money invested afterwards — never retrospectively to what you already hold.

The charge people forget

If you invest through a distributor, a transaction charge of ₹150 for a new investor or ₹100 for an existing one may be levied on each subscription of ₹10,000 or more — but only if that distributor has opted in. It is deducted from the subscription and the remainder is invested, so a ₹10,000 investment becomes ₹9,850 of units.

The point

The expense ratio is capped on a sliding scale that falls as the fund grows, is fungible within that cap, and is charged daily inside the NAV. The direct plan of a scheme holds the identical portfolio for less, permanently. Exit load applies only on the way out, and only inside the stated period.