Why Larger Funds Charge a Lower Expense Ratio: SEBI's TER Slab System Explained

Two equity funds can look identical on paper, same category, same benchmark, same fund house, and still charge noticeably different expense ratios. Often the simplest explanation is size. SEBI does not let a mutual fund charge a flat percentage of assets regardless of how large it gets. Instead, the maximum a fund can charge steps down in slabs as its assets under management rise, so a scheme managing Rs 50,000 crore is required to run on a thinner margin, as a percentage of assets, than a scheme managing Rs 500 crore.

This slab structure is one of the oldest cost protections in Indian mutual fund regulation, and it got a significant update on April 1, 2026, when SEBI's new Mutual Funds Regulations came into force.

The familiar Total Expense Ratio, or TER, was restructured and partly renamed to the Base Expense Ratio, or BER, with statutory taxes and levies pulled out of the capped figure entirely. The underlying principle, that bigger funds must pass on their economies of scale to investors, has not changed. What changed is the ceiling itself, and what is now counted inside it.

The expense ratio is the annual cost a fund charges to manage a scheme, covering the investment management fee paid to the AMC, registrar and transfer agent charges, custodian fees, trustee fees, and permitted marketing and administrative costs. It is not a bill investors pay separately. It is deducted daily from the scheme's assets and is already reflected in the Net Asset Value and the returns an investor sees, so the return quoted for a fund is always the return after this cost has been taken out.

Because it is expressed as a percentage of assets rather than a fixed rupee amount, the expense ratio scales with the size of the fund in absolute terms even while SEBI works to bring the percentage itself down as a fund grows larger.

Running a mutual fund scheme involves a mix of costs that do not grow in proportion to assets. A fund manager, a research team, a compliance desk and a back office cost roughly the same to run whether the scheme manages Rs 1,000 crore or Rs 30,000 crore. Once a scheme crosses a certain size, additional assets do not require a proportionally larger team to manage them. Left unregulated, an AMC could keep charging the same percentage indefinitely and simply pocket the difference as the fund grows.

SEBI's slab system is designed to prevent exactly that. By lowering the permissible percentage as AUM increases, the regulation forces AMCs to share the benefit of scale with investors rather than keeping it entirely as profit. This is the same logic that makes a large fund, all else equal, structurally cheaper to hold than a small one in the same category.

A fund's expense ratio is not fixed for life. As assets grow, the rulebook itself pushes the percentage down, whether the AMC wants that or not.

A common misunderstanding is that a fund is charged a single flat rate once its AUM crosses into a certain bracket. That is not how it works. The applicable rate is blended across successive tranches of assets, similar in logic to how income tax slabs apply progressively higher rates only to the income earned within each bracket, not to the entire income at the top rate.

The simplified illustration below shows how a blended rate is built up. The exact rupee breakpoints and percentages for each slab are set out in SEBI's regulations and each fund's scheme information document, and they were revised downward in April 2026, so treat the numbers here as a demonstration of the method rather than the current SEBI breakpoints.

AUM Tranche	Illustrative Rate Applied
First Rs 500 crore	2.10%
Next Rs 1,500 crore	1.90%
Remaining Rs 1,000 crore	1.70%

Hypothetical fund with Rs 3,000 crore in AUM. Blended rate works out to roughly 1.87%, not the 2.10% top of slab rate, because only the first Rs 500 crore is charged at that rate.

This blending is precisely why a fund's actual, reported expense ratio is almost always lower than the headline ceiling for its smallest AUM slab. The bigger a fund gets, the more of its assets sit in the cheaper upper tranches, and the closer its blended rate drifts toward the lowest slab in its category.

SEBI's board approved a full rewrite of the mutual fund regulations in December 2025, and the new SEBI Mutual Funds Regulations, 2026 took effect on April 1, 2026, replacing the 1996 framework. The centrepiece of the overhaul, for cost purposes, was a redefinition of what TER actually means. Under the new rules, Total Expense Ratio is defined as the sum of four separate components: the Base Expense Ratio, brokerage and transaction costs, regulatory levies, and statutory levies such as GST, STT, CTT and stamp duty.

Previously, statutory taxes and brokerage were bundled inside the single TER cap, which meant a change in a tax rate or a more actively traded portfolio could push a fund's TER up even though the AMC's own fee had not changed. From April 2026, the BER captures only what the AMC and its distribution chain actually earn for running the scheme, while taxes and transaction costs are shown separately, on actuals, above that cap.

Scheme Category	Cap Before April 2026	BER Cap From April 2026
Open ended equity schemes, smallest AUM slab	2.25%	2.10%
Open ended debt schemes, smallest AUM slab	2.00%	1.85%
Index funds and ETFs	1.00%	0.90%
Fund of funds investing over 65% in equity schemes	2.25%	2.10%
Other fund of funds	2.00%	1.85%
Close ended equity oriented schemes	1.25%	1.00%
Close ended other than equity oriented schemes	1.00%	0.80%

For open ended equity schemes, SEBI has said the blended BER now ranges roughly between 0.95% for the very largest funds and 2.10% for the smallest, a reduction of 10 to 15 basis points across most slabs compared with the old TER ceilings.

Notice that index funds and ETFs are not part of the AUM linked slab structure at all. Their cap is a single flat figure, now 0.90%, regardless of whether the fund manages Rs 200 crore or Rs 2 lakh crore. This reflects a different cost logic entirely. An index fund does not employ a research team to pick stocks, it simply replicates a published index, so its operating cost base is far smaller and does not carry the same fixed overheads that justify a sliding scale for actively managed schemes.

An index fund does not get cheaper because it grows bigger. It is already priced for the fact that nobody inside it is picking stocks.

The AUM slab discount and the direct plan discount are two separate mechanisms, and both apply at once. Within any given scheme, the regular plan's expense ratio includes a trail commission paid to the distributor who sold the fund, while the direct plan, bought straight from the AMC without an intermediary, strips that commission out entirely. This is why a direct plan almost always shows a meaningfully lower expense ratio than the regular plan of the exact same scheme, holding the exact same portfolio, on the exact same day.

A large, direct plan fund therefore benefits from both discounts at once: the lower blended rate that comes with scale, and the absence of distribution cost. That combination is a large part of why direct plan index funds in India can now run at a small fraction of a percent.

A few practical points follow from how the slab and BER system actually works:

• A large fund is not automatically cheaper than a small fund in the same category. The slab sets the maximum an AMC is permitted to charge, not what it must charge, and some AMCs price below the ceiling regardless of size.

• Compare the blended expense ratio shown in a fund's factsheet, not the headline ceiling for the smallest slab, since a large fund's actual rate will already sit well below that top figure.

• An expense ratio should generally drift down as a fund's AUM grows, not up. A rising expense ratio in a growing fund is worth questioning.

• Since April 2026, GST, STT, stamp duty and other statutory levies sit outside the BER cap. The full cost to an investor is BER plus these levies, so check the all in Total Expense Ratio figure, not the BER alone, when comparing schemes.

• Direct plans strip out distributor commission and will show a lower expense ratio than the regular plan of the identical scheme, independent of the AUM slab discount.

• Index funds and ETFs are not subject to the AUM linked slab. Their cap is flat, so a bigger index fund is not charging you less for size alone, though it may offer tighter tracking and better liquidity.

This article is for educational purposes only and does not constitute investment advice. Figures reflect the SEBI Mutual Funds Regulations, 2026 and related SEBI announcements as publicly available at the time of writing. Exact AUM breakpoints within each slab vary by scheme category and are published in individual scheme information documents and factsheets, and are subject to revision by SEBI. Readers should consult a registered investment adviser before making investment decisions.

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