Expense Ratio
Under SEBI (Mutual Funds) Regulations, 1996, Mutual Funds 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.
All such costs for running and managing a mutual fund scheme are collectively 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.
The regulatory limits of TER that can be incurred/charged to the fund by a Mutual Fund AMC have been specified under Regulation 52 of SEBI Mutual Fund Regulations.
Effective from April 1, 2020, the TER limit has been revised as follows.
|
AUM (Crore) |
TER for Equity Oriented Schemes (%) |
TER for other Schemes (excluding ETFs, Index Fund of Funds*) |
|
0 - 500 |
2.25 |
2.00 |
|
500 - 750 |
2.00 |
1.75 |
|
750 - 2000 |
1.75 |
1.50 |
|
2000 – 5000 |
1.60 |
1.35 |
|
5000 - 10,000 |
1.50 |
1.25 |
|
10,000 – 50,000 |
TER reduction of 0.05% for every increase of 5,000 crores AUM or part thereof |
TER reduction of 0.05% for every increase of 5,000 crores AUM or part thereof |
|
>50,000 |
1.05 |
0.8 |
*In case of Index Funds and ETFs: The total expense ratio of the scheme including the investment and advisory fees shall not exceed 1.00 percent of the daily net assets.
In case of Fund of Funds:
(i) investing in liquid schemes, index fund schemes and exchange-traded funds, the total expense ratio of the scheme including a weighted average of the total expense ratio levied by the underlying scheme(s) shall not exceed 1.00 percent of the daily net assets of the scheme.
(ii) investing a minimum of 65% of assets under management in equity-oriented schemes as per scheme information document, the total expense ratio of the scheme including a weighted average of the total expense ratio levied by the underlying scheme(s) shall not exceed 2.25 percent of the daily net assets of the scheme.
(iii) investing in schemes other than as specified in (i) and (ii) above, the total expense ratio of the scheme including a weighted average of the total expense ratio levied by the underlying scheme(s) shall not exceed 2.00 percent of the daily net assets of the scheme:
Provided that the total expense ratio to be charged over and above the weighted average of the total expense ratio of the underlying scheme shall not exceed two times the weighted average of the total expense ratio levied by the underlying scheme(s), subject to the overall ceilings as stated above in (i), (ii) and (iii).
This, if a mutual fund scheme has assets worth INR 100cr and spends INR 2cr in managing the fund, we say the fund has an expense ratio of 2%.
For more details, refer to the link below: amfiindia.com/investor-corner/knowledge-center/Expense-Ratio.html
TER has a direct bearing on a scheme’s NAV. Lower the expense ratio of a scheme, higher will be its NAV. Thus, TER is an important parameter while selecting a mutual fund scheme.