How Are Mutual Fund Expense Ratios (TER) Capped?

The Securities and Exchange Board of India (SEBI) sets the outer limit on how much of a scheme's assets an AMC can consume every year in fund management fees, administrative costs, and distribution expenses. This matters because the TER is deducted directly from the fund's Net Asset Value (NAV) before returns are reported to you, so a higher ceiling means more of your money can be absorbed by costs before it ever compounds. For the full breakdown of what makes up a TER and how it differs across plan types, see our companion guide on understanding mutual fund expense ratios. This guide focuses specifically on how the cap itself is structured.

A Slab-Based Ceiling, Not a Flat Rate

Rather than fixing one maximum percentage for every scheme regardless of size, SEBI regulates TER through a slab-based structure. Each slab corresponds to a range of the scheme's Assets Under Management (AUM), and the permitted maximum TER generally scales down as the AUM slab moves higher. In practice this means a scheme with a modest asset base is allowed a somewhat richer expense ceiling than an identical scheme that has grown into one of the largest in its category.

The logic behind this design is straightforward: many of an AMC's costs — research infrastructure, compliance, technology, back-office operations — do not scale linearly with assets. Once a fund crosses a certain size, the AMC is earning a larger absolute rupee amount even at a lower percentage, so regulators require that some of that operating leverage be passed back to unit holders as the fund gets bigger. We deliberately avoid quoting the exact current slab percentages here, because SEBI revises these ceilings from time to time, and a specific number stated as fact in an article can quietly go stale. Always treat the precise limits as something to check against SEBI's current circular rather than any fixed figure you read online.

The Cap Differs Across Fund Categories

The slab structure is not applied uniformly across every type of fund. Broadly:

• Equity-oriented schemes are generally permitted a higher TER ceiling than debt-oriented schemes, reflecting the more research- and management-intensive nature of active stock selection.
• Debt-oriented schemes operate under a lower ceiling, consistent with the narrower return expectations of fixed-income investing.
• Index funds and ETFs, which simply replicate a benchmark rather than actively picking securities, are subject to a materially tighter cap than actively managed equity or debt schemes — and most passive schemes in practice charge well below even that tighter ceiling.

Within each category, the same AUM-based slab logic applies: larger schemes face a lower permitted ceiling than smaller ones in the same category.

The Structural Direct-vs-Regular Gap

A separate but related layer of the TER cap concerns how a scheme is purchased. Every open-ended scheme in India must offer both a Direct Plan and a Regular Plan, and SEBI's framework requires the TER difference between the two to reflect only the commission paid to distributors in the regular plan — nothing more. In a direct plan, no distributor commission is paid, so that portion of the expense ceiling is simply not charged. In a regular plan, the AMC pays a trail commission to the distributor or platform out of the scheme's assets, and this is layered on top of the direct plan's cost base.

This is a structural gap, not an incidental one: it exists by design in every scheme that offers both plan types, and it persists regardless of which specific AUM slab a fund happens to sit in. Two investors holding the exact same underlying portfolio can see meaningfully different long-run returns purely because of which plan variant they bought into. Because this gap and its long-term compounding effect deserve more space than a single section here, our expense ratio guide walks through a worked example of how it plays out over a multi-decade SIP.

Why the Cap Matters When You Compare Funds

Because the ceiling itself moves with AUM and varies by category, the TER of two funds competing in the same space is rarely identical even before you account for how well each AMC is managed. A fund that has scaled up considerably should, all else equal, be operating under a lower permitted ceiling than a newer or smaller peer — so a wide TER gap between two similarly sized funds in the same category is often more informative than the raw number alone. When you shortlist schemes, it helps to line up their expense ratios side by side rather than judging each one in isolation; you can compare expense ratios on the fund comparison tool to see how a scheme's cost structure stacks up against its closest peers before digging into performance.

This article is educational and describes how the regulatory ceiling is structured; it is not a recommendation to buy, hold, or avoid any specific fund or plan type.