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NAV, loads and the daily price Β· 7 min Β· one of the trickiest

What a fund can charge

The TER caps, and the extras

The last two lessons covered the price you transact at; this one covers the cost of staying in, the Total Expense Ratio (TER). The TER is a scheme’s entire annual running cost expressed as a percentage of its daily net assets, and the point people miss is that it is deducted inside the fund, so the NAV is already net of it, you never receive a separate bill.

SEBI caps the TER, and the caps are worth knowing as a set. For regular open-ended equity and debt funds, the cap falls as the fund’s assets grow, deliberately passing economies of scale back to investors, so a very large fund is cheaper, per rupee, than a small one. Some caps are fixed and precise: index funds and ETFs are limited to 0.90%; a fund-of-funds is capped by what it holds (up to 0.90% for liquid/index/ETF underlyings, up to 2.10% for mainly equity-oriented schemes, and up to 1.85% for others); and a close-ended equity scheme is capped at 1.00% (others at 0.80%).

A scheme may add a little on top of the base cap, brokerage and transaction costs up to 0.06% of trade value in the cash market and 0.02% in derivatives, plus statutory levies and any exit load, and nothing else. Two more facts round it out: extra expense is permitted to widen the market, drawing new investors from B-30 cities and new women investors, and every AMC must disclose each scheme’s TER daily on its own and the AMFI website. Because a direct plan skips the distributor commission, its TER is always lower than the regular plan’s, a small yearly edge that, as the example shows, compounds into a real difference over decades.

  1. 1

    The Total Expense Ratio (TER) is a scheme's whole annual running cost as a percentage of its daily net assets, and it is already deducted inside the fund, so the NAV is net of it.

  2. 2

    SEBI caps the TER, and for regular open-ended equity and debt funds the cap falls as the fund's assets grow, so a larger fund is cheaper to be in.

  3. 3

    Index funds and ETFs are capped at 0.90% of daily net assets.

  4. 4

    A fund-of-funds cap depends on what it holds, up to 0.90% (liquid, index or ETF underlying), up to 2.10% (mainly equity-oriented schemes), or up to 1.85% (others).

  5. 5

    A close-ended or interval equity scheme is capped at 1.00%; other close-ended schemes at 0.80%.

  6. 6

    On top of the base TER, a fund may charge brokerage and transaction costs up to 0.06% of trade value in the cash market and 0.02% in derivatives, plus statutory levies and any exit load.

  7. 7

    Extra expenses are allowed to attract new investors from B-30 cities (beyond the top 30) and new women investors, to widen the market.

  8. 8

    Every AMC must disclose each scheme's TER daily on its own website and on the AMFI website.

Rupee example

Two versions of one fund run side by side. The direct plan carries a lower TER than the regular plan because it pays no distributor commission, so on identical holdings the direct plan's NAV grows a little faster every year, and over 20 years that small gap compounds into a real difference.

Practice

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Real exam format. Answer by voice, tap, or press 1 to 4. No negative marking, so always attempt.

The Total Expense Ratio of an index fund or ETF is capped at:

Index funds and ETFs are passive and cheap to run, so SEBI caps their TER at 0.90% of daily net assets.
2.25%, 5% and 'no cap' are not the index/ETF limit.

How does an investor pay the TER?

The TER is charged within the scheme and reflected in the daily NAV, so the investor never pays it as a separate charge.
It is not a separate bill, an entry-only fee, or a redemption charge.

For a regular open-ended equity fund, as its assets under management grow, the TER cap generally:

SEBI's slab structure lowers the permitted TER as AUM rises, passing economies of scale to investors.
The cap does not rise, stay fixed, or disappear as the fund grows.

A fund is allowed to charge some extra expense specifically to:

SEBI permits additional expense to widen reach, drawing new investors from B-30 (beyond top-30) cities and new women investors.
It is not for bonuses, general advertising or covering losses.

A close-ended equity scheme's TER is capped at:

Close-ended and interval equity schemes are capped at 1.00% of daily net assets (other close-ended schemes at 0.80%).
0.10%, 3.00% and 'no limit' are not the cap.
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