A mutual fund is a legal wrapper around a portfolio. Almost everything a buyer needs to know about it is set by four choices the sponsor made: what the scheme is allowed to hold, whether you are buying it through a distributor, what it charges, and what it says it is trying to beat.
How are mutual funds categorised in India?
India's scheme categorisation was imposed by the regulator because the first of those had become unreadable. Before it, a fund house could run eleven large-cap schemes with eleven different mandates and eleven marketing stories. The categorisation exercise forced every open-ended scheme into one of a fixed set of buckets with defined portfolio constraints, and forced one scheme per category per fund house [verify: SEBI circular on categorisation and rationalisation of mutual fund schemes, sebi.gov.in]. That one-scheme rule carries standing exceptions, for index funds and exchange-traded funds tracking different indices and for sectoral or thematic schemes covering different sectors, so a fund house running several of those is not breaching it. A large-cap fund must hold a stated minimum in the top hundred companies by market capitalisation. A mid-cap fund draws from a defined rank band. A flexi-cap fund may go anywhere but must keep a stated minimum in equity. For you as a reader, the payoff is that the category name now carries information. The first thing to check about any scheme is whether its actual portfolio matches the category it's filed under.
Advertisement
What is the difference between a direct and a regular plan?
The direct plan against regular plan distinction is the largest avoidable cost in Indian retail investing and you won't see it unless you look for it. Both plans hold the identical portfolio, run by the identical manager, with the identical strategy. They differ in one thing. The regular plan pays a commission to the distributor who sold it to you, and the direct plan does not. So the regular plan's expense ratio is higher by roughly the commission, and its net asset value grows more slowly forever [verify: SEBI (Mutual Funds) Regulations require the direct plan's expense ratio to be lower to the extent of distribution expenses; confirm the current wording at sebi.gov.in].
So how much does it cost you? Put a number on it. Fifteen thousand rupees a month for ten years, a portfolio returning 11.0% gross, a direct-plan expense ratio of 0.62% and a regular-plan ratio of 1.72%. Working in effective monthly rates, the direct plan compounds at 0.826386% a month and reaches ₹30,58,046. The regular plan compounds at 0.742268% and reaches ₹28,87,538. The gap is ₹1,70,509 on ₹18,00,000 invested.
There are three ways to read the same gap, each closer to the truth than the last. It is 1.10 percentage points a year, which sounds like nothing. It is 5.58% of the terminal wealth, which sounds like a rounding error. It is 15.68% of the entire gain the regular plan produced, and that is its true size. The ₹18,00,000 was never at risk of being lost to fees. Only the ₹10,87,538 of gain was ever in play. Whenever somebody quotes a fee as a share of assets, convert it to a share of the expected gain before you decide whether it is small.
What is the expense ratio ceiling?
The fund's own expenses are capped, and the cap comes as a slab schedule of several rates. Since 1 April 2026 the capped figure is the base expense ratio. It excludes the statutory levies (goods and services tax, transaction taxes, stamp duty, and regulator and exchange fees) and brokerage within its own limit. Those now sit on top and are disclosed separately, so the total expense ratio a factsheet quotes is the base ratio plus them. For an open-ended equity scheme the schedule runs in tranches of daily net assets, each with its own rate. It steps down above a threshold and has a floor at the top [verify: SEBI (Mutual Funds) Regulations, 2026, Regulation 66, in force from 1 April 2026 in place of the 1996 Regulations. The old schedule started at 2.25% with the levies inside. See sebi.gov.in and the fund houses' addenda of March 2026, checked October 2026].
| Tranche of daily net assets | Rate on that tranche |
|---|---|
| First ₹500 crore | 2.10% |
| Next ₹250 crore | 1.90% |
| Next ₹1,250 crore | 1.60% |
| Next ₹3,000 crore | 1.50% |
| Next ₹5,000 crore | 1.40% |
| Next ₹40,000 crore | reduce by 0.05 points for every ₹5,000 crore or part thereof |
| Above ₹50,000 crore | 0.95% |
How do you work out the blended ceiling?
Compute the blended ceiling the way you would compute a progressive income tax, tranche by tranche, and never by looking up the marginal rate. A scheme with ₹12,000 crore of daily net assets is permitted ₹177.25 crore of annual expense, which is a blended ceiling of 1.4771%. Its marginal rate in the ₹10,000 to ₹15,000 crore band is 1.35%. The difference of 0.127 percentage points is the amount by which the marginal rate understates what the fund may charge. Run the same arithmetic at other sizes and the ceiling falls as the fund grows: 1.7625% at ₹2,000 crore, 1.4771% at ₹12,000 crore, 1.3383% at ₹32,000 crore, 1.1921% at ₹60,000 crore. (Under the 1996 schedule, with the levies inside the cap, the same ₹12,000 crore fund was allowed 1.5844%.)
Two readings follow, and the second is the useful one. The obvious reading is that scale is supposed to be passed on to the holder. The useful reading is that the ceiling is a ceiling and not a price. A fund charging 1.55% against a ceiling of 1.5844% is charging essentially the maximum. A fund charging 0.62% against the same ceiling has made a competitive decision you should notice. Read the charge against the cap for a fund of its size, and leave the average of all funds out of it.