SEBI doesn’t cap a mutual fund scheme’s expense ratio at one flat percentage. It caps it on a graduated slab tied to the scheme’s own AUM - the same structure income tax brackets use. For an open-ended equity scheme, the permitted rate runs 2.25% on the first ₹500 crore of assets, then steps down to 2.00% on the next ₹250 crore, 1.75% on the next ₹1,250 crore, 1.60% on the next ₹3,000 crore, and 1.50% on the next ₹5,000 crore. Each band’s rate applies only to the assets sitting inside that band - not to the scheme’s entire AUM.
That makes the scheme’s actual expense ratio a weighted average across every band it has grown through, recalculated as AUM changes:
Blended (weighted-average) TER for an open-ended equity scheme as AUM rises through SEBI’s slab structure.
- ₹400 crore AUM: blended TER = 2.25% - the whole scheme still sits inside the first slab.
- ₹1,000 crore: blended TER ≈ 2.06%.
- ₹4,000 crore: blended TER ≈ 1.75%.
- ₹10,000 crore: blended TER ≈ 1.61%.
The Fee Fell Without the Investor Doing Anything
None of that requires anything from an existing investor. They didn’t add money, didn’t ask for a fee cut, didn’t switch plans. As other investors’ SIPs and lump sums pushed the same scheme’s AUM from ₹400 crore to ₹10,000 crore, every existing unit-holder’s daily expense charge fell automatically, purely as a mechanical consequence of the slab structure - roughly 64 basis points lower, on the numbers above, without a single decision by the investor or a fee change announced by the AMC.
It Moves Back Up When the Pool Shrinks
It runs the other way too. If a scheme’s AUM falls - a market correction, a wave of redemptions - a smaller pool of assets sits across fewer, higher-cost bands, and the blended TER moves back up for whoever is still holding units. An expense ratio, under this structure, isn’t a contractual number fixed at the time of investment the way a bank account’s annual fee is. It moves with the size of the pool, for everyone in the pool, all the time - and the direction it moves depends on what every other investor in the same scheme happens to be doing.
Track the expense ratio as a moving number tied to scheme AUM, not a rate fixed at the time you invested. It falls as the pool grows and rises as it shrinks, and the direction depends on what every other investor in the scheme is doing.
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