Mutual fund investors often focus on returns, fund managers and past performance, but one factor quietly influences long-term wealth creation every single year: the expense ratio. Even a small difference in annual expenses can become meaningful when money remains invested for 10, 15 or 20 years.

SEBI has now changed the way mutual fund expenses are structured, introducing a Base Expense Ratio (BER) framework and revising the expense caps applicable to mutual fund schemes. The new framework under the SEBI (Mutual Funds) Regulations, 2026 became effective from April 1, 2026.

The overall objective is straightforward: make the cost structure more transparent, separate fund-management expenses from certain transaction and statutory costs, and ensure that the benefits of scale are reflected in what investors pay.

What is an expense ratio?

A mutual fund does not manage investors’ money for free. Asset management companies incur expenses for fund management, administration, distribution, technology, compliance, research and other activities.

These costs are ultimately deducted from the assets of the scheme.

For example, if a mutual fund generates a gross portfolio return of 12% and its expenses amount to 1.5%, the return available to investors will effectively be lower, before considering other factors.

This is why expense ratios matter enormously over long periods.

Until now, investors were generally familiar with TER, or Total Expense Ratio. Under the revised framework, SEBI has introduced the concept of BER — Base Expense Ratio.

The distinction is important.

Under the new structure, the Total Expense Ratio will broadly comprise the BER plus permitted brokerage costs, regulatory levies and statutory levies. SEBI has specifically stated that statutory and regulatory charges such as STT/CTT, GST, stamp duty, SEBI fees and exchange fees associated with trades can be charged on actuals, subject to the applicable framework.

Therefore, investors should not automatically assume that the difference between the old TER cap and new BER cap will translate into an identical reduction in the final expense charged by every scheme.

How have the limits changed?

The table shown in the image highlights the revised limits for equity-oriented open-ended mutual fund schemes.

For schemes with assets under management of up to ₹500 crore, the earlier maximum expense ratio was 2.25%, while the revised BER limit is 2.10% — a difference of 15 basis points.

For the ₹500 crore to ₹750 crore slab, the limit moves from 2.00% to 1.90%.

Between ₹750 crore and ₹2,000 crore, it moves from 1.75% to 1.60%, again representing a 15-basis-point difference.

As fund size increases, the permitted percentage steadily declines.

A scheme in the ₹5,000 crore to ₹10,000 crore slab moves from an earlier 1.50% limit to a new BER cap of 1.40%.

For ₹20,000 crore to ₹25,000 crore, the corresponding figures are 1.35% and 1.25%.

For schemes with AUM above ₹50,000 crore, the old limit of 1.05% compares with a revised BER cap of 0.95%.

These slab-wise limits were approved by SEBI as part of its overhaul of the mutual fund expense framework.

The image focuses on equity-oriented schemes. Other categories have separate limits. For example, SEBI approved a revised BER ceiling of 0.90% for index funds and ETFs, while different ceilings apply to various categories of fund-of-funds and non-equity schemes.

Why does AUM affect the expense ratio?

The logic is based on economies of scale.

Imagine two mutual funds: one manages ₹300 crore while another manages ₹30,000 crore.

Many operating activities do not become 100 times more expensive simply because the fund becomes 100 times larger. Larger schemes therefore have an opportunity to spread their fixed and semi-fixed expenses across a much bigger asset base.

SEBI's slab structure attempts to ensure that investors participate in these economies of scale.

In simple terms, as the fund gets bigger, the percentage of assets that can be charged as expenses comes down.

What does this mean for investors?

The most important long-term benefit could be lower cost leakage.

Suppose two investments generate identical portfolio performance but one consistently charges slightly lower expenses. Over one or two years, the difference might look insignificant. Over 15 or 20 years, however, compounding can make the gap considerably larger.

A reduction of even 0.10 percentage point represents ₹100 annually for every ₹1 lakh of assets, before considering compounding. Across a ₹10 lakh portfolio, that becomes ₹1,000 a year.

For an investor continuing SIPs for decades, relatively small annual savings can accumulate into meaningful amounts.

But investors should keep the new BER structure in perspective.

The BER is not necessarily the final amount investors will see as TER. Brokerage and eligible statutory or regulatory levies may sit outside the BER and form part of the ultimate TER. SEBI's revised approach is therefore as much about improving transparency in the composition of expenses as it is about reducing specific caps.

What does it mean for asset management companies?

For AMCs, lower base expense caps can create pressure on fee income, particularly for large actively managed funds.

An official July 2026 SEBI-filed SBI Funds Management prospectus itself identified the new BER framework and reduced TER caps as a potential fee-compression risk for the asset-management business.

That pressure could encourage AMCs to improve operating efficiency, adopt technology more aggressively and manage larger pools of money with tighter costs.

It may also make the difference between actively managed and low-cost passive products even more important for investors evaluating funds.

The bigger takeaway

SEBI's revised expense framework is another step toward making India's rapidly growing mutual fund industry more transparent and investor-focused.

Lower expense caps are positive, but investors should not choose a mutual fund simply because it has the lowest cost.

Expense ratio should be considered alongside the fund's investment objective, portfolio quality, consistency, risk profile, fund-management approach, tracking difference in passive funds and suitability for the investor's financial goals.

The key change is that investors now need to understand both BER and TER.

BER tells you the permitted base cost of running the scheme, while the final TER may include permitted brokerage and statutory or regulatory expenses.

For long-term investors, that greater visibility matters. Returns attract attention, but costs are one of the few variables investors can evaluate before investing — and every rupee saved in unnecessary expenses remains invested and gets another opportunity to compound.

Disclaimer: This article is for educational and informational purposes only and should not be considered investment advice. Mutual fund investments are subject to market risks. Investors should read scheme-related documents carefully before investing.