Of 618 direct equity mutual fund schemes (those that do not have a distribution commission), 62% increased their total expense ratios from September 2024 – when the indices started to fall – to March 2025, according to a Mint analysis. The analysis showed that 21% of the schemes reduced their expense ratios and 17% maintained the same rate.
The total expense ratio (TER) is a measure of the costs of managing and operating a mutual fund and is paid by those who invest in it. Typically, asset managers raise the TER when a scheme’s assets under management decline.
However, the Mint analysis found that among the 381 direct equity schemes that increased TERs, the assets of 284 schemes, or 74%, actually increased.
The market regulator has prescribed a slab-based structure for TER, where the maximum that can be charged depends on the size of the scheme’s assets.
If an equity mutual fund has assets of ₹500 crore, the maximum TER allowed is 2.25%. If the assets increase to ₹750 crore, the maximum permissible TER drops to 2%. As the scheme size grows and crosses higher thresholds, the TER must be reduced, in line with the slab structure.
There is a catch, though. There are no regulations from the Securities and Exchange Board of India (Sebi) that specify when mutual fund houses can increase the TER.
Function of factors
“If an AMC isn’t meeting the profitability targets or costs, they might raise TER and if everyone is in the same boat, other AMCs might raise it too,” said Shravan Shetty, managing partner at Primus Partners.
As long as the TER increase is within the Sebi criteria, it is fine, said Shetty. He added that the expense ratio may also be determined on the basis of profit and loss, volume assumptions and growth, and if the assumptions aren’t met, AMCs may adjust the TER.
Mutual fund regulations prescribe the maximum TER that can be charged for a scheme on the basis of the AUM. However, the actual TER charged could be a function of factors such as AUM, expenses, business or commercial considerations and others, said Nehal Sampat, a partner at Price Waterhouse & Co LLP.
He added that there are no restrictions on the periodicity of revising TERs – just that the changes have to be communicated to investors by SMS or email.
“Even though equity schemes increased their TER despite a rise in AUM, it could be due to a technical adjustment as AMCs might be anticipating outflows or redemptions,” a fund manager said on condition of anonymity. The person added that fund houses may also expect the market to remain little changed or to decline further, making it more prudent to plan conservatively rather than make hasty adjustments later.
According to Akhil Chaturvedi, executive director and chief business officer at Motilal Oswal AMC, any increase or decrease in TER is a broad function of three elements – AUM movements, operational expenses and distribution commissions – and is based on the size of the scheme and flows.
In some cases, fund managers may be playing catch-up on TERs.
“One possibility is that regulations allow an AMC to charge up to 2.25% on a ₹500 crore AUM, but as a fund manager I chose to charge only 2%,” a compliance person from an AMC said. “Now that I have the headroom, I can leverage that extra 0.25% I wasn’t charging before.”
The situation is the opposite for regular mutual fund schemes, which charge distribution commission. Among regular equity schemes, only 9.5% increased their TER, while 51% retained the TER and 39% decreased the TER from September to March.
A part of the TER for regular MF schemes goes to the AMC as fees, and the remainder is paid to the distributor.
The reason that more AMCs increased direct TERs and more AMCs decreased regular TERs is brokerage. If an AMC has a direct TER of 1% and a regular TER of 3%, the difference – 2% – is the brokerage.
In the case of regular hybrid schemes, the average TER was 1.74% in March compared with 1.75% in September 2024. For regular debt schemes, the average TER in March was 0.69% compared with 0.7% in September 2024.
Loophole
Sebi suggested in a consultation paper in 2023 that TER slabs should be at the AMC level and not at the scheme level. The bigger the scheme, the lower the TER because large schemes are assumed to have cost efficiencies.
Sebi said in the consultation paper that costs don’t go up much when the AUM grows. For example, fund managers and research teams usually stay the same even if the fund gets larger.
Another reason mentioned in the draft paper is that when an AMC launches a new fund, it starts with a small AUM and is allowed to charge a higher TER. This creates a loophole where AMCs push these new schemes with higher commissions to distributors. As a result, investors might be moved out of older, larger, and cheaper schemes into newer ones.
Sebi deferred its plan to rationalise TER. Former chairperson Madhabi Puri Buch said it would come up with a second consultation paper on the matter.