Mutual Fund Charges

What are Mutual Fund Charges?

Mutual funds are professionally managed investment instruments. Mutual fund charges are the regulated costs of running a scheme. The charges levied help compensate the expenses related to managing, distributing, and operating these funds. These mainly include the Total Expense Ratio (TER), which covers fund management fees, administrative costs, and other operating charges. Apart from this, an exit load may be charged when investors redeem their units before a defined holding period. The Securities and Exchange Board of India (SEBI) ensures that these charges are fairly disclosed to investors.

Types of Mutual Fund Charges

When you invest in mutual funds, you incur costs that impact your net returns. These may be one-time charges like exit loads, recurring costs such as the expense ratio and management fees, and statutory levies like STT and GST.

Here are the main types of mutual fund charges:

1. Exit Load

   Exit load is scheme-specific and applies if you redeem within the scheme’s stated period. SIP redemptions follow the same load rules date-wise (FIFO). It assists fund houses to manage liquidity and deters premature withdrawals. It is scheme-specific.

   SIP withdrawals may attract exit loads, usually 1% for equity mutual funds, provided they are redeemed within one year of investment. SIP redemptions are subject to the same exit load rules as the lump-sum units (no separate SIP withdrawal charges apply). However, capital gains tax applies according to the holding period and the fund type. 

   Exit loads differ based on the scheme. Reviewing the scheme's offer document to know the exact load structure before investing is essential.

   • Equity Funds: Typically 1% if redeemed within 1 year

   • Debt Funds: Exit load is not standard across most debt funds; many avoid exit load or have other structure

   • Liquid Funds: Graded exit load applies to redemptions within 7 days (According to the SEBI, 2019 circular)

   • Overnight Funds: No exit load

2. Expense Ratio

   The Asset Management Company (AMC) charges an annual fee to the investors to manage the mutual funds. This fee is referred to as the expense ratio. It involves administrative costs, marketing expenses, and distribution commissions (in case of regular plans). Here’s the formula to calculate it:

   Expense Ratio (%) = (Total Expenses / Average AUM) * 100

   Suppose a mutual fund has ₹12 Crore expenses on ₹600 crore AUM, then the TER is 2%.

   SEBI earlier permitted an additional 0.30% TER for inflows from cities beyond the top 30 (B30). However, this benefit has been kept in abeyance since 1 March 2023. Fund houses may levy only up to 0.05% additional TER if no exit load is charged, which is allowed strictly under prescribed conditions.

   Direct plans have lower expense ratios than regular plans because they exclude distributor commissions.

   There are no separate SIP withdrawal charges; if applicable, the exit load is applied to each instalment based on its purchase date (FIFO). The expense ratio itself covers the operational costs and fund management expenses.

3. Securities Transaction Tax

   STT at 0.001% is levied on the redemption or sale of equity-oriented mutual fund units. It does not apply to debt-oriented funds. Equity-oriented hybrid schemes (with ≥65% equity allocation) attract STT on redemption, while debt-oriented hybrids do not. Though small in percentage terms, this charge is deducted at redemption and slightly reduces overall returns.

4. Switching Fees

   Switching between schemes of the same fund house is treated as a redemption from one scheme and a fresh purchase into another. Switching between schemes of the same fund house is treated as a redemption plus a fresh purchase. No standard AMC-imposed switching fee exists, but exit load and capital gains tax may apply. Some platforms or specific schemes may impose a nominal fee (0.25% to 1%), though this is not industry-standard.

   Switching helps adjust your portfolio or move between dividend and growth plans. Reviewing the fund’s switch rules before making adjustments is always advisable.

5. Advisor Fees/ One-time Charges

   Investors may incur advisory fees when seeking investment guidance. These charges vary based on the type of advisor. SEBI regulates Registered Investment Advisers (RIAs) and must adhere to prescribed fee structures, either a fixed fee or an Assets Under Advice (AUA)-based model (according to the 2020 guidelines and latest master circulars). On the other hand, mutual fund distributors are typically compensated through commissions included within the fund’s Total Expense Ratio (TER), and not via direct fees from investors.

   • Regular Plans: Advisor fees are included in the expense ratio. 

   • Direct Plans: Zero advisor fees as investors handle their investments independently.

6. Recurring Charges

   These refer to ongoing costs subtracted from the fund’s pool of assets. Usually, they are charged annually.

7. Management Fee

   Investors pay this fee to fund managers to manage portfolios, make investment decisions, and ensure compliance. Its value differs based on the AMC and the fund type.

8. GST

   Applied to regular and direct plans, Goods and Services Tax (GST) is 18% on investment management/advisory services and is accounted for within TER. It is covered in the expense ratio. It impacts the investment returns.

9. Account Maintenance Fees

   AMCs typically do not impose a separate 'account maintenance fee' on investors. Instead, operational costs, such as customer service, recordkeeping, and account statement delivery, are included within the scheme’s TER, as permitted under SEBI regulations. However, some investment platforms or intermediaries may charge platform-specific subscription or service fees for account access, premium features, or reporting tools. These charges vary by provider and are not standard across the mutual fund industry.

Understanding Expense Ratio in Regular Plans

In regular plans, investors need to pay distribution commissions. So, these plans have a higher expense ratio compared to direct plans. Mutual fund brokerage charges differ based on the chosen investment scheme. 

The Total Expenses means all operating costs (including fund manager’s fees, etc.) The TER also includes distribution and service fees (for regular plans), effectively the commissions paid to distributors. In direct plans, these costs are absent. 

Average AUM indicates the Average Assets Under Management over the particular period.

Suppose a mutual fund has ₹600 crore AUM and its total expense incurred is ₹12 crore, then the expense ratio is calculated as,

Expense ratio = (12/600) *100 = 2% 

Understanding Expense Ratio in Direct Plans

In direct plans, investors buy mutual fund units directly from the Asset Management Company (AMC) without intermediaries. The expense ratio still includes fund management fees, administrative and operational expenses, but excludes distributor commissions and service fees.

From 8 August 2025, SEBI scrapped the earlier ₹100/₹150 per SIP or lump sum transaction charges payable by AMCs to distributors. This makes direct plans more cost-effective, as the commission savings are passed back to investors as a lower TER. Over the long term, even a small cost difference can significantly improve returns through compounding.

If the same mutual fund with ₹600 crore AUM incurs only ₹9 crore in expenses (since no distributor fees apply), then:

Expense Ratio = (9 ÷ 600) × 100 = 1.5%

Thus, direct plans provide a lower expense ratio than regular plans, boosting long-term investor returns.

Note: The usual distributor commissions in TER continue under revised payout norms, so only transaction-level charges have been abolished.

Comparison of Mutual Fund Charges in Direct and Regular Plans

Direct and regular plans differ mainly in how investors invest and the charges involved. 

What Are SEBI Guidelines on Mutual Fund Charges?

SEBI (Mutual Funds) Regulations, 1996, govern the mutual fund charges to promote market transparency and ensure investor protection. The guidelines are:

• Entry load has been eliminated since 2009 for all mutual fund schemes to encourage transparency and decrease the upfront costs.

• The maximum expense ratio depends on the AUM and the chosen fund type.

• The exit load should be clearly disclosed in the documents of the mutual fund scheme.

• According to SEBI norms, AMCs must publicly share expense ratio updates and fee details.

• After TER is deducted daily, the NAV is issued for investors. 

• NAV is published after daily expense accruals (TER).

• SEBI capped TER in slabs (Oct 2018 circular, updated in Master Circular 2024) to help prevent excessive fees for investors. It determines the maximum permissible expense ratio depending on the fund’s AUM. These limits are:

Key Takeaways

Your investment outcomes depend a lot on the mutual fund charges. As discussed above, they cover essential services like fund distribution, management, compliance, etc. Understanding how they are charged to choose between a regular and a direct plan is vital. You can minimise costs and improve net returns by opting for direct plans or low-cost index funds/ETFs, avoiding unnecessary switches, and reviewing exit load structures.

If you plan to commence your investment journey, you can start SIP in the best mutual funds in India. It helps you craft a long-term investment routine.