8.5 The Expense Ratio Framework: Base Expense Ratio, Brokerage and Statutory Levies
Key Takeaways
- From 1 April 2026 the regulatory cap is the Base Expense Ratio, which excludes all statutory levies.
- Total Expense Ratio is now the sum of BER, brokerage, regulatory levies and statutory levies.
- Open-ended equity schemes carry a BER cap of 2.10% on the first INR 500 crore, falling to 0.95% above INR 50,000 crore.
- Index funds and ETFs are capped at 0.90% BER, and close-ended equity schemes at 1.00%.
- Brokerage caps net of levies are 6 basis points for cash market and 2 basis points for derivative transactions.
What Changed on 1 April 2026
This is the part of the syllabus most likely to be wrong in older material, so the change is worth stating precisely.
Under the framework in force until 31 March 2026, the Total Expense Ratio (TER) cap was a single number that had to accommodate everything, including statutory levies such as GST, securities transaction tax and stamp duty. Levies therefore competed with genuine management costs inside one ceiling.
From 1 April 2026, under the SEBI (Mutual Funds) Regulations, 2026:
- The regulatory cap is now the Base Expense Ratio (BER), which excludes all statutory levies.
- Statutory and regulatory levies — STT and CTT, GST, stamp duty, SEBI fees, exchange fees — are charged on actuals, over and above permissible brokerage limits.
- Total Expense Ratio is now defined as the sum of BER, brokerage, regulatory levies and statutory levies.
TER = BER + brokerage + regulatory levies + statutory levies
Because levies moved outside the cap, the cap itself was reduced so that the overall cost to investors falls rather than rises.
Base Expense Ratio Slabs for Open-Ended Schemes
The caps apply on a slab basis: each tranche of assets carries the rate for its own slab.
| Daily net assets (INR crore) | Equity-oriented BER | Other than equity BER |
|---|---|---|
| Up to 500 | 2.10% | 1.85% |
| 500 to 750 | 1.90% | 1.65% |
| 750 to 2,000 | 1.60% | 1.40% |
| 2,000 to 5,000 | 1.50% | 1.25% |
| 5,000 to 10,000 | 1.40% | 1.15% |
| 10,000 to 15,000 | 1.35% | 1.10% |
| 15,000 to 20,000 | 1.30% | 1.05% |
| 20,000 to 25,000 | 1.25% | 1.00% |
| 25,000 to 30,000 | 1.20% | 0.95% |
| 30,000 to 35,000 | 1.15% | 0.90% |
| 35,000 to 40,000 | 1.10% | 0.85% |
| 40,000 to 45,000 | 1.05% | 0.80% |
| 45,000 to 50,000 | 1.00% | 0.75% |
| Above 50,000 | 0.95% | 0.70% |
The structure delivers economies of scale to unitholders: as a scheme grows, the permitted rate on additional assets falls, so investors in large schemes pay proportionately less.
Caps for Other Scheme Types
| Scheme type | BER cap |
|---|---|
| Index funds and exchange traded funds | 0.90% |
| Fund of funds investing in liquid schemes, index funds or ETFs | 0.90% |
| Fund of funds investing more than 65% of AUM in equity-oriented schemes | 2.10% |
| Other fund of funds | 1.85% |
| Close-ended equity-oriented schemes | 1.00% |
| Close-ended other than equity-oriented schemes | 0.80% |
Each of these was reduced from the previous cap, which had included statutory levies — index funds and ETFs, for example, moved from 1.00% including levies to 0.90% excluding them.
Brokerage Caps
Brokerage is charged in addition to BER, within its own limits, now expressed exclusive of statutory levies:
| Transaction type | Cap |
|---|---|
| Cash market transactions | 6 basis points |
| Derivative transactions | 2 basis points |
The previous caps of 12 and 5 basis points included statutory levies; net of those levies they amounted to roughly 8.59 and 3.89 basis points, so the revision is a genuine tightening rather than a relabelling.
The Exit-Load Add-On Is Gone
The additional 5 basis points that schemes charging an exit load were permitted to levy, as a transitional measure, has been removed.
What May Be Charged
Permissible recurring expenses include investment management and advisory fees, trustee fees, custodian charges, registrar and transfer agent fees, audit and legal costs, marketing and selling expenses including distributor commission, investor communication costs, and the mandated contribution towards investor awareness initiatives.
Direct and Regular Plans
Every scheme offers both, holding the identical portfolio. The direct plan's expense ratio must be lower, because no distribution commission is embedded in it. The difference broadly equals the commission cost, and it compounds:
Illustration. INR 10,00,000 invested for 15 years at a gross return of 12%, with a regular plan expense ratio 0.70 percentage points higher than the direct plan. Compounding at 11.30% versus 12.00% produces a difference of several lakh rupees over the period. The gap is arithmetic, and a distributor should acknowledge it while explaining what the regular plan's cost buys.
Reading a Fact Sheet Correctly
Because TER is now a composite figure, comparing two schemes requires care. A scheme with heavy derivative activity carries more brokerage and levies within its TER than a low-turnover scheme with the same BER. Comparing BER tells you about the fund house's charging; comparing TER tells you what the investor actually bears. Both are worth knowing, and they are no longer the same number.
Under the framework in force from 1 April 2026, how is Total Expense Ratio defined?
What is the Base Expense Ratio cap for an open-ended equity-oriented scheme on the first INR 500 crore of daily net assets, and for an index fund?
Two equity schemes report the same Base Expense Ratio, but one has substantially higher portfolio turnover including derivative activity. What follows?