Glossary of Mutual Fund Terms

Expense Ratio

A Mutual Fund must bear some costs while running its business. As per SEBI guidelines, certain expenses that are incurred by the Mutual Fund in managing a scheme must be attributed to the scheme only. For instance, a fund house must pay a salary to the fund manager of the scheme, the Mutual Fund distributors must be paid their commissions for selling the scheme, the fund house would have incurred some marketing cost while launching the scheme and would continue to incur marketing expenses for promoting the scheme to investors. As per the SEBI guideline on expenses, all such expenses which are incurred for managing and operating the specific scheme must be allocated to the scheme.

A scheme invests the pool of investor money in certain assets which is the basket of securities it holds in its portfolio. The value of this portfolio is the value of assets held by the scheme. On the other hand, the scheme has certain expenses as explained above. Apart from the expenses listed above, the scheme also incurs transaction costs while buying and selling securities in its portfolio on a regular basis. All these costs together account for the total expense of the scheme.

In order to ensure that Mutual Funds don’t go overboard in theirs spends to manage their schemes, SEBI has set guidelines for what the expense ratio of a scheme can be. Expense ratio is the percentage of the scheme’s assets that is used up in managing and operating the scheme. All the expenses we spoke about earlier are paid for by the scheme’s assets. Since the Mutual Fund scheme’s assets are nothing but the money invested by the public, SEBI has set limits for the expense ratio so that fund houses are prudent in their spending. As per an order issued by SEBI on September 18, 2018, Mutual Funds are allowed to charge Total Expense Ratio (TER) that is linked to their Assets Under Management (AUM) as provided in the below table:

AUM (Crore)

TER for Equity Oriented Schemes (%)

TER for other Schemes (excluding ETFs, Index   Fund of Funds)

0 - 500



500 - 750



750 - 2000



2000 – 5000



5000 - 10,000



10,000 – 50,000

TER reduction of 0.05% for every increase of 5,000 crore AUM or part thereof

TER reduction of 0.05% for every increase of 5,000 crore AUM or part thereof




TER of Index Funds, ETFs and Fund of Funds (FoFs) shall be maximum of 1%.

Thus, if a Mutual Fund scheme has assets worth ` 100 crore and spends ` 2 crore in managing the fund, we say the fund has an expense ratio of 2%.

Exit Load

Some Mutual Fund schemes charge an exit load on redemptions or cancellation within a stipulated time period.

Exit Load is like a penalty for premature redemptions because it is meant to discourage investors from selling their Mutual Fund investments too soon. Mutual Funds are not meant for short-term investments unless you are parking your surplus cash in a liquid fund. Since Mutual Funds are subject to market volatility, they are best suited for medium to long-term goals. Hence, most Mutual Fund schemes except liquid funds charge an exit load if investors sell their investment within the stipulated period.

Exit load is charged as a percentage and is applied on the redemption amount. If exit load is 1% then you’ll receive 99% of your redemption amount if you sell your investment before the stipulated period. Exit load as a percentage is applied on the NAV applicable to your redemption. If the NAV at the time of redemption is ` 100, you will receive only ` 99 for each unit of Mutual Fund investment you decide to redeem.


Ex-dividend date

When a Mutual Fund scheme declares dividend, the NAV of the scheme falls to the extent the amount of dividend was declared on the next business day, when the units of the scheme are available for trading in the market. The day when the NAV of the scheme falls by the same amount as the amount of dividend declared or capital gain distributed to investors, is called the Ex-Dividend Date.

If the NAV of a Mutual Fund scheme is ` 200 before the dividend was declared and the scheme declares a dividend of ` 20 per unit, the NAV of the scheme will fall to ` 180 on the ex-dividend date i.e. the day on which the scheme will start trading in the market at a NAV of ` 180.