TER drag
Alias for expense ratio drag — the compounding wealth cost of a fund's Total Expense Ratio over an investment horizon.
TER drag is the same concept as expense ratio drag, using the regulatory term Total Expense Ratio (TER) — the SEBI-mandated label for the all-inclusive annual cost that a mutual fund charges to its scheme. This page provides additional context on TER structure under SEBI regulations that supplement the core drag calculation.
What TER includes
TER is not just the fund management fee. Under SEBI's framework, TER is a cap on the total cost charged to the scheme NAV daily, and it includes:
- Investment management fee (the AMC's core charge)
- Trustee fees
- Custodian charges
- Registrar and transfer agent (RTA) costs
- Audit fees
- Marketing and distribution costs — including brokerage on portfolio trades and, for regular plans, the distributor trail commission
The key distinction for investors: Direct plans exclude distributor commission. Regular plans include it. The TER difference between direct and regular is purely the distributor's cut — typically 0.5–1.0% for equity funds.
SEBI TER caps (current schedule)
| Daily AUM slab | Equity funds (cap) | Debt funds (cap) |
|---|---|---|
| First ₹500 Cr | 2.25% | 2.00% |
| Next ₹250 Cr | 2.00% | 1.75% |
| Next ₹1,250 Cr | 1.75% | 1.50% |
| Next ₹3,000 Cr | 1.60% | 1.35% |
| Next ₹5,000 Cr | 1.50% | 1.25% |
| Next ₹40,000 Cr | Slide to 1.05% | Slide to 0.80% |
| Above ₹50,000 Cr | 1.05% | 0.80% |
(Per SEBI circular SEBI/HO/IMD/DF2/CIR/P/2018/67; subject to revision — always verify current caps.)
How drag compounds
The drag calculation is identical to expense ratio drag. TER is deducted from NAV daily in practice (TER / 365 per day), which means the compounding erosion begins from day 1 and compounds continuously.
NAV_net(t) = NAV_net(t−1) × (1 + r_daily) × (1 − TER/365)
Over 20 years, a 1.5% TER difference (direct vs. regular) on a ₹10 lakh investment at 12% gross return reduces terminal corpus by approximately ₹18–20 lakh — nearly doubling the original investment is left on the table for the distributor.
Practical implication for NRI investors
NRIs often invest through distributor-intermediated regular plans because direct plan access from abroad can be operationally complex. The annual drag on regular vs. direct equity plans is 0.6–1.2% — over 15–20 years this erodes 8–15% of terminal corpus. Accessing direct plans through platforms like MFCentral, Coin (Zerodha), or directly through AMC portals using NRE/NRO account linkage resolves this.
Related metrics
- Expense Ratio Drag — the core computation page; use either this or that article for the full calculation.
- AUM Decay — the other structural impediment to large-fund returns.
- Alpha — a fund's excess return must exceed its TER differential vs. an index fund to justify the active fee.
Sources
TER data: AMFI mandatory monthly disclosures. SEBI cap schedule: SEBI/HO/IMD/DF2/CIR/P/2018/67. Direct vs. regular TER differential computed from AMFI data, scheme-by-scheme, updated monthly.