What is Expense Ratio in Mutual Fund? Know the new rules

Anindita Nayak

Bhubaneswar, 29 March 2026

: Under the SEBI Mutual Funds Regulations from 1996 mutual funds can charge expenses to manage a scheme. These expenses include costs like marketing and advertising, administrative work, transaction charges, investment management fees, registrar and custodian fees, as well as audit expenses. All these costs are charged as a percentage of the funds net assets.

This sum of the expenses is referred to as the Total Expense Ratio (TER). TER simply reflects the general cost of operating and managing a mutual fund scheme.

The TER is expressed as a percentage of the average Net Asset Value (NAV) of the scheme and these costs will be deducted prior to the daily publication of the NAV to investors. This indicates that the returns that you are getting are already factoring in these expenses.

The structure of expenses in India is flexible, i.e. there are no predetermined boundaries on the number of expense categories, provided that the sum of TER does not exceed the limits of SEBI. These limits are as stipulated in the SEBI Mutual Fund Regulations Regulation 52.

The Government of India has initiated the Mutual Fund Regulations 2026 according to which SEBI has lowered the expense ratio of mutual funds by a maximum of 15 basis points, which shall come into effect on April 1, 2026. The rationale behind this move is to ensure that investing becomes more cost effective to investors.

According to the new rules, the highest expense ratio of open-ended equity funds whose assets below 500 crore has been reduced to 2.10 in place of 2.25, and that of debt funds in the same category to 1.85. Moreover, SEBI has made the Total Expense Ratio (TER) base the Base Expense Ratio (BER).

Among the changes is the fact that external charges like GST, stamp duty, STT, CTT and other statutory charges are no longer included in BER. Rather, BER will be composed of basic fund expenditure such as management fees, distribution costs, and registrar fees whereas TER will be the summation of the expense which comprises these external expenditures.

As much as the decrease in the expense ratios might be considered to be dramatic, the real gain will be made to the investors when the new costs in practice are posted by the fund houses.

Effective from April 1, 2026 the TER limit has been revised as follows.

The impact of the Total Expense Ratio (TER) on the NAV of a scheme is direct that the less the expense, the higher the NAV. Thus, TER is one of the aspects that one should take into consideration when selecting a mutual fund scheme.