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%.
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 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.
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