Mutual Fund fees decoded: what you’re actually paying for
See how TER works, why AMCs limit AUM, and what happens in euphoric markets
We’ll cover:
Where your money goes when you invest in a mutual fund
How much AMCs earn from TER
Why AMCs don’t always want unlimited AUM
What happens in euphoric markets
How to use this knowledge to invest smarter
Where does your money go in a Mutual Fund?
The Total Expense Ratio (TER) is the annual fee charged to manage your money. It typically ranges between 0.5% and less than 1% for direct funds and is automatically deducted from your investment value.
What does it pay for?
Fund manager salaries
Research and analytics
Technology and operations
Marketing and branding
Important:
If an AMC overspends or operates inefficiently, those costs are ultimately borne by investors unless regulations cap or disallow them.
Later, I’ll explain why overspending by an AMC is usually caught by the market itself. There is no escape route: persistent inefficiency becomes a recipe for disaster for the AMC, something they are well aware of.
This is why worrying excessively about the expense ratio is often pointless. Moreover, expense ratios change over time. Making decisions based on a moving variable is neither efficient nor reliable regardless of whether the ratio looks low or high today.
Can AMCs overcharge you?
Not arbitrarily. Two regulators oversee every rupee:
SEBI (Securities and Exchange Board of India)
AMFI (Association of Mutual Funds in India)
Key guardrails:
TER must be published daily for every scheme
All expenses must be supported by valid documentation
Every scheme is overseen by an Independent Board of Trustees
Expenses that don’t directly benefit investors cannot be passed on
India’s mutual fund ecosystem is among the most regulated in the world.
How much of the TER goes to the AMC?
Roughly 40–60% of the TER becomes income for the AMC. Example: A mid-sized fund manages ₹10,000 crore with a 0.5% TER:
Annual revenue = ₹50 crore from just one scheme
Check annual reports of HDFC AMC, UTI AMC, or Nippon India 85–95% of their revenue comes from TER fees. This is why AMCs focus so heavily on Assets Under Management (AUM):
More AUM × Same fee = More revenue.
Why AMCs don’t always want unlimited AUM
It sounds counterintuitive, but bigger isn’t always better. Especially in small-cap and mid-cap funds, high AUM can create problems:
These funds must keep 65–70% invested in their category
Small- and mid-cap stocks are often illiquid
Buying too much drives up prices artificially
Selling large positions can trigger sharp price drops
Result: Fund returns suffer.
In later posts, I’ll explain why active funds generally can’t outperform index funds over the long term. But the real challenge lies in defining what “long term” actually means.
What happens in euphoric markets?
During bull markets and liquidity surges, AMCs often:
Restrict lump sum inflows
Hold excess cash
Launch New Fund Offers (NFOs)
Why? Existing schemes can’t absorb unlimited money without distorting NAVs or portfolio balance. NFOs become a temporary release valve. But here’s a pattern worth noting: When too many NFOs are launched in a short period, it often signals market overheating. What usually follows? A correction.
What should you do as an investor?
A few takeaways:
Don’t chase the lowest TER blindly.
Low expenses matter but only in context of fund category, AUM, and liquidity constraints.Understand liquidity in small/mid-cap funds.
A fund with low TER but very high AUM may struggle to deploy capital efficiently.Watch behavioral signals.
If an AMC is launching multiple NFOs during a market rally, they may be reacting to sentiment, not fundamentals.
Final thought
Mutual funds aren’t a black box. The TER you see represents real costs, real choices, and real consequences. Some people ask: “Why go this deep into something so technical?” Here’s why:
Because clarity is what separates passive investors from confident ones.
When you understand what you’re paying for and what you’re getting in return, you invest with purpose. And purpose is the most underrated metric in investing.
What’s next?
This is just one layer. Upcoming posts will break down:
Fund AUM
Investment strategy
Risk and volatility
Style drift and exit loads
Why high expense ratios compared to peers are unsustainable and how AMCs know this keeps them in check
Follow along as we peel back every layer of mutual fund investing so your decisions are driven by conviction, not marketing.
Glossary recap
AMC: The company managing your mutual fund
TER: The total annual cost you pay for fund management
SEBI: The market regulator keeping things fair
AMFI: The mutual fund industry body
NFO: A new mutual fund launched for subscription
Correction: A 10%+ market decline
Market Cycle: The natural rise and fall of prices over time
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