Recurring expenses
The ongoing fees and commissions a mutual fund scheme pays its constituents, charged as a percentage of AUM and deducted before NAV is struck — so higher recurring expenses mean lower investor returns.
In plain language
Running a mutual fund scheme is not free. The AMC, the distributor, the custodian, the RTA and others involved in operating the scheme all have to be paid, and that payment comes out of the scheme itself, not from the AMC's own pocket. These ongoing charges are the scheme's recurring expenses.
They matter to every unit holder directly, because the deduction happens before the NAV is struck. The scheme's gross investment gains are reduced by its recurring expenses first; what is left is what the NAV reflects.
How it works
Recurring expenses are charged as a percentage of the scheme's assets under management (AUM). Because SEBI has imposed strict limits on how much can be charged this way, the sum of all such charges is captured and disclosed as the Total Expense Ratio (TER):
TER = Base Expense Ratio (BER) + Brokerage cost + Transaction cost of executing trades + Statutory levies (including GST)
AMCs must disclose TER on a daily basis, scheme-wise and date-wise, on their own website and on AMFI's, under a separate head — for every scheme except infrastructure debt fund schemes. Any single item of expenditure that accounts for more than 10% of total expenditure must be separately disclosed in the scheme's accounts or the notes to them.
A worked example
Sagarmatha Balanced Fund has an AUM of Rs 500 crore. Over a year its recurring expenses break down as:
| Head | Amount | % of expenditure |
|---|---|---|
| AMC's investment management fee | Rs 6.0 crore | 60% |
| Distributor trail commission | Rs 2.5 crore | 25% |
| RTA, custodian and audit fees | Rs 1.0 crore | 10% |
| Statutory levies (GST etc.) | Rs 0.5 crore | 5% |
| Total recurring expenses | Rs 10 crore | 100% |
As a percentage of AUM, that is 2% (10 ÷ 500) — the scheme's TER for the year, published daily on the AMC's and AMFI's websites. Because the management fee (60%) and the trail commission (25%) each exceed 10% of total expenditure, both must be separately disclosed in the scheme's accounts rather than folded into a single 'other expenses' line.
Had the scheme instead run at a leaner 1.2% TER, the same Rs 500 crore AUM would have shed only Rs 6 crore to expenses — leaving Rs 4 crore more inside the scheme, compounding for every unit holder.
Why NISM asks about it
Chapter 2, section 2.1.4 (Important Concepts in Mutual Fund Units) introduces recurring expenses as one of the basic building blocks alongside face value, unit capital, NAV and AUM; Chapter 5's Disclosure of Total Expense Ratio then gives the formula and the disclosure rules. Expect a question on what recurring expenses are charged against (AUM, as a percentage), the direction of their effect on NAV (inverse), and the TER formula's components.
Common exam traps
- Recurring expenses reduce NAV; they are not added on top of it the way an entry load once was.
- TER is disclosed daily, not monthly or quarterly — scheme-wise and date-wise, on the AMC's and AMFI's websites.
- The 10% disclosure trigger is a share of total expenditure, not a share of AUM — do not conflate the two percentages.
- Recurring expenses are distinct from a one-time exit load, which is deducted only on redemption and does not form part of the ongoing TER calculation.
Where this is taught
- Series V-A · Chapter 2: Concept & Role of a Mutual Fundintroduced here
- Series V-D · Chapter 2: Concept & Role of a Mutual Fundintroduced here
- Series V-B · Chapter 2: Concept and Role of a mutual fundintroduced here
Related terms
- Net Asset ValueThe net assets of a mutual fund scheme divided by the number of units outstanding — what one unit of the scheme is worth on a given day, after every liability except the unitholders' own.
- Assets under ManagementThe total value of the money a scheme or a fund house manages — the current NAV multiplied by units outstanding — and the base on which the expense ratio is charged.
- Exit loadA charge levied when an investor redeems units, calculated as a percentage of NAV and deducted from it, usually only if the units are sold within a stated holding period.
- Total Expense RatioThe all-in annual cost of a mutual fund scheme as a percentage of daily net assets — the base expense ratio plus brokerage, transaction cost and statutory levies — charged to the scheme, not billed to the investor.
- Trail commissionThe commission an AMC pays a mutual fund distributor as a percentage of the current value of the investments they brought in, calculated daily and paid for as long as the investor stays invested.
- Base Expense RatioThe management-and-administration slice of a scheme's cost, capped by the SEBI slabs — the first and largest of the four components that add up to Total Expense Ratio.