You never get a bill from your mutual fund. That's precisely why its costs are easy to ignore — and why they matter. Fund charges are deducted quietly, as small percentages, and small percentages compound into large numbers over decades.
The total expense ratio (TER)
The TER is the annual cost of running the fund, expressed as a percentage of assets. It covers fund management, administration, and (in regular plans) distributor commission. It's deducted daily from the NAV, so the returns you see are already net of it — you simply earn less than the fund's gross return.
SEBI caps the TER on a sliding scale: smaller funds may charge more, large funds less. As a rough guide:
- Actively managed equity funds: often ~1.0%–2.0% (regular plans higher; direct plans lower because they carry no commission).
- Index funds and ETFs: far cheaper, frequently ~0.1%–0.4% in direct plans.
A 1% TER difference doesn't sound like much, but on a 20-year SIP it can cost lakhs (see our piece on direct vs regular plans). Over time, cost is one of the few things you can control with certainty.
Exit load
An exit load is a charge for redeeming too soon — commonly 1% if you redeem within a year (varies by scheme; liquid/overnight funds usually have none). It exists to discourage churn. Always check the load structure in the scheme document before you invest, and factor it in if you might switch (for example, moving from a regular plan to direct).
The other small costs
- STT (Securities Transaction Tax) on equity fund redemptions.
- Stamp duty of 0.005% on every purchase/SIP instalment.
- For ETFs, brokerage and the bid–ask spread on the exchange (an index fund avoids these).
These are minor individually but worth knowing.
How to read it
The NAV already reflects the TER, so don't double-count it — but compare TERs when choosing between similar funds, especially index funds where the product is near-identical and cost is the main differentiator. You'll find the current TER and exit load on the fund's factsheet and the AMC/AMFI website; TERs are updated and disclosed regularly.
The takeaway
You can't predict a fund's returns, but you can read its costs before you buy. Prefer direct plans, favour low-cost index funds for core exposure, and treat a high TER the way you'd treat a high recurring fee on anything else — with suspicion, because you'll pay it every year you stay invested.