Sometime in May, when April’s expense data filters into factsheets and screeners, some funds will appear dramatically more expensive than they were in March.
In the first seven days under the new format, over twenty schemes reported a daily total expense ratio (TER) above 10%. A handful crossed 20%. One thematic fund briefly showed above 50%.
Before concluding that asset management companies have lost the plot, it’s worth understanding what changed — and where the maths breaks down.
What changed
Until now, the TER was a single bundled number. Asset management companies (AMCs) could allocate costs within regulatory caps, and certain real costs — brokerage, securities transaction tax (STT), stamp duty and exchange charges — sat outside the disclosed figure.
Investors were paying these costs. They just couldn’t see them.
The new framework unbundles everything. The disclosed TER is now:
TER = Base expense ratio (BER) + brokerage + transaction costs + statutory levies
The Base Expense Ratio (BER) covers what the AMC controls: management fees, distribution commissions, RTA charges, custodian fees and trustee expenses. It is the closest successor to the old TER. Caps and line items have been restructured, but the spirit remains similar.
Everything else now sits outside the BER but inside the TER.
From a net asset value (NAV) standpoint, nothing has changed. These costs were always deducted before arriving at the NAV. The reform changes the label, not the price.
The issue is not what Sebi included. It’s how the number is reported.
The annualization problem
Each component is reported daily and then annualized.
For BER, annualization makes sense. It is a relatively stable charge that accrues at roughly the same rate every day.
Brokerage and STT are different. They are transaction costs. They arise only when the fund trades and scale with trading volume, not assets under management (AUM).
Annualizing a single day’s transaction cost assumes that the same level of trading repeats for 365 days. That’s not how funds operate.
An arbitrage fund rolls its derivatives book on specific days. An index fund trades when the index rebalances. An active fund trades when it sees opportunity.
Consider a fund that receives 10% of its AUM as an inflow and deploys it. The effective transaction cost that day may be around 0.0172% of fund value. Annualized, that becomes 6.3%.
That calculation assumes the fund receives 10% inflows every single day for the rest of the year — clearly unrealistic.
The resulting TER is mathematically correct but practically useless.
AMFI’s first few days of data under the new format illustrate the distortion:
One arbitrage fund reported a TER of 14% on April 1, 4.74% on April 2, and 0.93% on April 3. Its BER was a steady 0.79%.
An index fund swung from 15.34% to 1.47% to 1.06% over the same period. Its BER: 0.90%.
The stable cost did not change. The trading activity did.
What investors should track
The BER is the number to compare across funds. It reflects the AMC’s cost structure and replaces the old TER for meaningful comparisons.
Choosing between two large-cap funds? Compare their BERs.
The variable component — TER minus BER — serves a different purpose. It provides a near real-time window into how the fund operates.
Previously, if you wanted to know how much a fund traded, portfolio turnover ratios were reported with a lag. Now, you can see it in real time as spikes in variable costs can signal trading activity.
- A surge in an index fund’s variable cost likely reflects a rebalancing.
- Persistently high variable costs in an active fund could signal heavy churn or large inflows being deployed.
Over time, as monthly averages smooth out, the variable component may become a useful proxy for trading activity.
A value fund with consistently low costs is likely buying and holding, sticking to its style. An active fund whose variable costs rival its BER month after month is trading aggressively — and investors should ask whether that activity is generating sufficient returns.
The daily number, however, should not be used for comparison. Investors should rely on rolling averages and avoid comparing March TERs with April TERs. They are different metrics carrying the same label.
The framework also has limits.
Exit loads and STT on redemptions remain outside the TER framework. Investors looking only at the headline number still do not see the full cost of entering and exiting a fund.
SEBI has improved transparency. But the annualization methodology may need refinement to prevent misinterpretation.
Vashistha Iyer is executive director at Capitalmind Mutual Fund.