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The Securities and Exchange Board of India (Sebi) has recast the expense ratio framework for mutual funds by splitting the earlier total expense ratio (TER) into a base expense ratio (BER) and statutory levies. The move seeks to improve transparency and tighten cost discipline across schemes.
How BER is different
Under the new framework, the BER includes only expenses directly related to running a mutual fund scheme. These cover management fees, distributor commissions, registrar and transfer agent charges, custody costs, and other administrative expenses.
Statutory levies—such as securities transaction tax (STT) or commodities transaction tax (CTT), goods and services tax (GST), stamp duty, Sebi’s regulatory fees, and exchange fees—now sit outside the BER. Earlier, the TER bundled these items together, which made it difficult for investors to separate fund-house charges from market- or tax-driven costs.
Will expense ratios fall?
Sebi has lowered the maximum permissible expense ratio limits across several asset-size slabs by around 10–15 basis points (bps). It has also cut caps for categories such as index funds, exchange-traded funds (ETFs), fund-of-funds (FoFs), and closed-end schemes.
A lower BER, however, may not always translate into a sharp reduction in overall costs. “Since statutory levies are inherently market- and tax-driven and now sit outside the capped base, the total cost may not fall sharply in every scheme,” says Ankur Punj, managing director and business head, Equirus Wealth.
The impact is likely to be more visible in large schemes. “Cost will definitely go down for schemes where AUM size is more than ~40,000 crore. For AUM of less than ~40,000 crore, overall cost may be neutral or go up slightly by 1–2 bps,” says Akhil Chaturvedi, executive director and chief business officer, Motilal Oswal AMC.
Punj adds that fee cuts will be most evident in higher-AUM, plain-vanilla categories where caps have moved down. “Smaller or already low-cost segments may show little change, like large active equity funds, higher-AUM debt funds, index funds or ETFs, and closed-end funds as well,” says Punj. Clarity will improve once the revised structure is fully implemented.
Greater transparency
Improved transparency is the key gain. “The core idea of this framework and the resultant larger advantage is transparency on charges,” says Sriram B. K. R., senior investment strategist, Geojit Financial Services.
They can now see what they pay the fund house for portfolio management, separate from unavoidable statutory costs. “Investors can compare returns versus cost for each fund easily,” says Chaturvedi.
“Investors and advisers can use expense ratio as a tie-breaker between funds of similar quality,” says Punj. He adds that this could encourage a gradual shift towards more cost-efficient products.
The framework also helps investors track how expenses behave as assets scale up, offering insight into whether fund houses pass on economies of scale.
Brokerage caps for cash-market transactions have fallen from about 12 basis points to 6 basis points, with even lower limits for derivatives. “Since brokerage is a recurring cost linked to portfolio turnover, especially in actively managed funds, this change could help contain trading-related expenses over time,” says Niharika Tripathi, head of products and research, Wealthy.in.
Potential downsides
Tighter fee caps may affect distribution economics, especially in smaller cities where investments remain distributor-led. “If distributor incentives weaken, investors in these regions may experience reduced on-ground support,” says Punj.
Lower margins could also put pressure on smaller or niche fund houses, which may eventually lead to consolidation in favour of larger players.
Why expense ratios matter
Expense ratios are a certain drag on returns, irrespective of market performance. “Even small differences compound significantly over time and directly reduce investor wealth,” says Ranjit Jha, managing director and chief executive officer, Rurash Financials.
A monthly investment of ~10,000 over 20 years at a 12 per cent gross return grows to about ~84.1 lakh with an expense ratio of 1.50 per cent, but nearly ~85.7 lakh with an expense ratio of 1.35 per cent. A difference of 15 basis points adds about ~1.5 lakh over time.
Market conditions make costs even more relevant. “Returns over the past five years have been exceptionally high and future returns are likely to moderate. In the past year, for instance, the Nifty 50 has barely reached a 10 per cent return. On such returns, whether you pay a TER of 2 per cent or 1 per cent definitely matters, as it means a sacrifice of 10 to 20 per cent of the total return you make,” says Aarati Krishnan, head of advisory, PrimeInvestor.
Expense ratios across fund types
In active equity funds, higher costs can be justified only by consistent outperformance. If expenses remain well above the category average without matching results, investors should look at more cost-efficient options.
In passive funds, costs are critical because these schemes do not aim to beat the market. “Any additional expense directly drags down performance,” says Jha. Tighter caps on index funds and ETFs by Sebi should therefore benefit investors through lower expenses and possibly improved tracking.
Expense ratios have an outsized impact in debt funds because returns are limited. Even modest fees can materially erode net yields. With debt fund returns likely to stay in the mid-single-digit range, investors should prefer funds with stable strategies, low churn, and competitive expense ratios so that most of the interest income accrues to them.
What investors should do
The shift to a BER framework calls for review, not frequent switching. Small cost differences rarely justify churn once exit loads, taxes, and timing risks come into play. A 10–20 basis point gap often matters less than investment approach, portfolio construction, and consistency across cycles.
Investors should examine fact sheets to track BER stability, transaction costs, and post-expense performance. Those in regular plans may reassess direct plans where suitable. The new framework works best as a tool for clearer cost monitoring rather than as a trigger for constant changes. “Ultimately, what matters most is which funds deliver the best risk-adjusted returns after all fees, consistently over time—and that judgement cannot be made on expense ratios alone,” says Tripathi.
5 points to know about expense ratios
- Expense ratios reduce returns, and even small differences compound over time
- When market returns moderate, costs become more significant, with higher TERs taking a larger share of gains
- In active equity funds, higher costs are acceptable only if backed by consistent outperformance
- In passive funds, low costs are essential because any expense directly lowers returns
- Expense ratios matter greatly in debt funds as well, where limited returns mean even small fees can materially erode yields
The writer is a Mumbai-based independent journalist.
