When you spare your hard-earned money and invest in mutual funds, you are supposed to know of the expenses these funds levy. As a matter of fact, mutual funds are permitted to charge certain operating expenses for managing the scheme. These expenses, under the umbrella of TER (total expense ratio), include sales and marketing, advertising expenses, administration expenses, transaction costs, investment management fees, registrar fees and audit fee, among other expenses.
Since the TER is a proportion of the total fund assets, it tends to impact your total returns (in hand you receive) as an investor. A lower TER implies higher returns for investors.
For instance, if there are two funds with 14 per cent gains each but one has a TER of one per cent, while the other charges two per cent TER. The total returns will fall to 13 per cent and 12 per cent, respectively.
But as the market regulator SEBI has placed limits on the maximum expense ratio which fund houses can charge, there does not remain a significant difference between what AMCs charge for the funds they manage. However, the difference still lies between direct and regular scheme as we elaborate in the table below.
“Earlier the expense ratio would vary drastically across mutual funds. However, SEBI has now standardised the maximum expense ratio that a mutual fund can charge. Now the difference in expense ratio lies in direct versus regular scheme. A mature investor would prefer direct mutual funds either through self-help or an advisor,” says Ankur Kapur, Founder of Plutus Capital.
Maximum Total expense ratio (TER)
|AUM ( ₹crore)||TER for equity-oriented schemes (%)|
|0 – 500||2.25|
|500 – 750||2|
|750 – 2,000||1.75|
|2,000 – 5,000||1.6|
|5,000 – 10,000||1.5|
|10,000 – 50,000||TER reduction of 0.05% for every increase of 5,000 crore|
|More than 50,000||1.05|
So, we can see from the above table that the smallest schemes can charge the highest expenses, and with increase in the fund size, the costs decline. For debt schemes, the TER is 0.25 per cent lower across all slabs.
Direct and regular plans
Direct plan and regular plan have the same portfolio, are part of the same mutual fund scheme but they still have different expense ratios. Understandably, direct plan has lower expense ratio than regular Plan, since no agent or distributor is involved in them. The total expense ratio of direct plans is usually lower as compared to regular plans.
Return on direct & regular funds varies on the basis of expense ratio:
|Mutual Fund||Regular (%)||Direct (%)||Difference (%)|
|DSP Top 100 Equity Fund||8.72||9.52||0.8|
|HSBC Large Cap Equity Fund||11.33||12.28||0.95|
|IDFC Large Cap Fund||12.29||13.45||1.16|
|Tata Large Cap Fund||11.64||12.87||1.23|
|Nippon India Large Cap Fund||12.19||13.23||1.04|
|Mirae Asset Large Cap Fund||13.60||14.72||1.12|
* Five-year returns posted by large cap funds as on March 9, 2022.
It is important to note that a high expense ratio does not necessarily mean lower returns. A fund with poor return can have low expense ratio and at the same time, a high performing fund may charge a higher expense ratio. However, it is vital to compare a fund’s expense ratio with that of its performance. If the TER is growing continuously without any significant improvement in performance, then it is not a healthy trend for investors.
But it must be seen that although TER is an important criterion to consider while selecting funds, it is not the only one.