Why MF expense ratios are showing higher numbers

Investors are noticing higher expense ratios across several mutual fund schemes these days. This is largely due to a change in the way fund houses report costs, following new guidelines issued by the markets regulator that came into effect on April 1. Here’s what the change means for investors.

WHAT IS THE CHANGE IN REPORTING THE TOTAL EXPENSE RATIO (TER) AS MANDATED BY THE REGULATOR? Until March 31, Sebi had required fund houses to report only the base expenses and the GST on those expenses as part of the TER. The base expense ratio included management fees paid to the fund manager and the asset management company for running the portfolio, along with operating expenses such as registrar and transfer agent fees, custody charges, audit costs and other day‑to‑day administrative expenses for direct plans. In the case of regular plans, distributor commissions and servicing fees were also included. Other costs, such as brokerage, transaction costs and statutory levies linked to actual trades, were charged to the scheme’s net asset value within regulatory limits but were excluded from the reported TER. With effect from April 1, this reporting framework has been revised. Fund houses are now required to include these previously excluded components while disclosing TER, bringing trading‑related costs into the headline number seen by investors

HOW DOES THE NEW STRUCTURE WORK?

Under the revised disclosure norms, the TER now represents the full cost of running a mutual fund scheme. It is calculated as the sum of the base expense ratio, brokerage and transaction costs incurred for executing trades, and statutory levies including GST. As a result, the TER now reflects not just the fixed and recurring expenses of managing the scheme, but also costs that arise from portfolio churn and execution activity. This is aimed at offering investors a more transparent view of what they are paying.

WHY ARE INVESTORS FINDING THE TER HIGH ON PARTICULAR DAYS?
In funds that see frequent buying and selling of securities, such as arbitrage funds and equity savings funds, investors may notice that the reported TER spikes on certain days. This happens because while base expenses remain largely stable, brokerage, transaction costs and trade‑related statutory levies are incurred only on days when the fund actually executes trades. Since all expense components are annualised over 365 days for reporting purposes, days with higher trading activity can result in a higher annualised TER for that day, even if costs normalise or fall back on days with little or no trading.

WHAT SHOULD INVESTORS DO?
When evaluating a mutual fund or comparing expense ratios across schemes, investors should focus primarily on the base expense ratio, as it best captures the ongoing cost structure of the fund. Sharp one‑day spikes in TER are often linked to portfolio rebalancing or arbitrage rollovers rather than a permanent increase in costs. A consistently high TER over time, however, may indicate that a fund follows a high‑churn strategy, sees frequent inflows and redeployment of capital, or carries a material arbitrage component. The key takeaway is that while the reported TER may look higher or more volatile, it now offers a clearer and more comprehensive picture of costs that investors were already bearing but could not see earlier