What a fund can charge

The last two lessons covered the price you transact at; this one covers the cost of staying in, the Total Expense Ratio (TER). The TER is a scheme’s entire annual running cost expressed as a percentage of its daily net assets, and the point people miss is that it is deducted inside the fund, so the NAV is already net of it, you never receive a separate bill.

SEBI caps the TER, and the caps are worth knowing as a set. For regular open-ended equity and debt funds, the cap falls as the fund’s assets grow, deliberately passing economies of scale back to investors, so a very large fund is cheaper, per rupee, than a small one. Some caps are fixed and precise: index funds and ETFs are limited to 0.90%; a fund-of-funds is capped by what it holds (up to 0.90% for liquid/index/ETF underlyings, up to 2.10% for mainly equity-oriented schemes, and up to 1.85% for others); and a close-ended equity scheme is capped at 1.00% (others at 0.80%).

A scheme may add a little on top of the base cap, brokerage and transaction costs up to 0.06% of trade value in the cash market and 0.02% in derivatives, plus statutory levies and any exit load, and nothing else. Two more facts round it out: extra expense is permitted to widen the market, drawing new investors from B-30 cities and new women investors, and every AMC must disclose each scheme’s TER daily on its own and the AMFI website. Because a direct plan skips the distributor commission, its TER is always lower than the regular plan’s, a small yearly edge that, as the example shows, compounds into a real difference over decades.