Total Expense Ratio
Mutual Funds, under SEBI (Mutual Funds) Regulations, 1996, are permitted to charge certain operating expenses for managing a mutual fund scheme – such as sales & marketing / advertising expenses, administrative expenses, transaction costs, investment management fees, registrar fees, custodian fees, audit fees – as a percentage of the fund’s daily net assets referred to as ‘Total Expense Ratio’ (TER). The TER is calculated as a percentage of the Scheme’s average Net Asset Value (NAV). The daily NAV of a mutual fund is disclosed after deducting the expenses.
As per the SEBI Regulations, AMCs are required to disclose the TER of all schemes on a daily basis on their websites as well as AMFI’s website.
TER has a direct bearing on a scheme’s NAV – the lower the expense ratio of a scheme, the higher the NAV. Hence, TER is an important parameter while selecting a mutual fund scheme because in long term, it leads to a sizeable deduction in final corpus.
TER limits is decided as follows:
- SEBI's maximum TER slabs for equity-oriented schemes (as a % of daily net assets, illustrative - AMCs may charge less, and SEBI revises these slabs from time to time):
- First Rs. 500 crore of AUM: up to 2.25%
- Next Rs. 250 crore: up to 2.00%
- Next Rs. 1,250 crore: up to 1.75%
- Next Rs. 3,000 crore: up to 1.60%
- Next Rs. 5,000 crore: up to 1.50%
- Above Rs. 50,000 crore: around 1.05%
- Debt-oriented schemes are typically capped about 0.25% lower at each slab.