Show me the incentives and I’ll show you the outcome’ – Charlie Munger said in his famous Harvard address in 1995. As an investor, to choose the right financial products and gauge performance, you need to be aware of the fees and commissions you’re paying.
While costs may not matter in guaranteed-return products such as bank deposits, or post office schemes, they matter a lot in market-linked products. Here’s the low-down on how they work.
MFs: Track the TER
On most financial products, the fee that you pay for money management is different from the commission you pay to the agent who sells you the product.
In mutual funds though, both costs are packed into the Total Expense Ratio or TER. Securities Exchange Board of India (SEBI) lays down the maximum TER that MFs can charge. Equity-oriented MFs can charge a maximum TER at 2.25 per cent of their daily net assets, while debt funds can charge 2 per cent.
These limits apply only to the smallest open-end schemes. As scheme size grows, MFs need to bring down the TER on incremental assets in line with a slab-based system. Therefore, an equity fund can charge 2.25 per cent on the first ₹500 crore, but on the next ₹250 crore, it can charge just 2 per cent. On the next ₹1,250 crore, the limit falls to 1.75 per cent. This TER cap shrinks to 1.05 per cent beyond ₹50,000 crore. For debt schemes, the TER cap is set at 0.80 per cent on assets beyond ₹50,000 crore. Index funds and liquid funds are subject to tighter TERs of 1 per cent.
This slab-wise structure means that in a strange twist, the more successful MFs cost less to own than newbie funds, just another reason to prefer funds with a track record over NFOs.
The TER contains most expenses incurred by the fund — management fee, distributor commission, advertisement and marketing, payments to service providers such as custodians, registrars and fund accountants. But some costs fall outside it such as brokerage on buying and selling securities, Securities Transaction Tax (STT) and GST on fund management fees. However, these are still deducted from the Net Asset Value (NAV). An additional cost that can be charged to you beyond the TER is an exit load for quitting the scheme too early. Exit loads are added to the scheme’s NAV.
SEBI also requires all MFs to offer a Regular Plan with embedded distributor commissions and a Direct plan without them, so you have the choice of reducing your TER by not using an intermediary.
It is quite easy to gauge MF performance after costs, because NAVs are calculated only after deducting all costs. However, a key thing to note is that the MF TER compounds right along with your investment. Even an innocuous TER can add up to a pretty large number over the life of your investment, because it is calculated on the NAV which keeps compounding over time.
ETFs: Layered but low
Exchange Traded Funds (ETFs) are mutual funds which own a basket of securities that is listed and traded on stock exchanges. Buyers and sellers of ETFs transact on the exchange with each other.
When you buy ETF units, you will incur brokerage costs and STT in addition to the TER. But ETFs being passive products, their TERs are usually very low. However, a hidden cost with ETFs is that the market price you pay to buy units may vary widely from its NAV. Paying a stiff premium over NAV eats into your returns.
NPS: Transactions pinch
In terms of the way it levies charges, National Pension System (NPS) is the polar opposite of MFs. It levies an extremely reasonable fee to manage your money but has a dozen other costs tucked away in its fine-print.
NPS allows its fund managers to charge a maximum fee of 0.09 per cent. This cap applies to the first ₹10,000 crore of assets and reduces to 0.03 per cent for assets beyond ₹1.5 lakh crore, a fraction of MF fees.
But transacting in the NPS can cost you a pretty penny. If you are using an intermediary (called POPs or Points of Presence), you pay an account opening fee of ₹400 and a processing fee of 0.5 per cent every time you put money into your account, this fee is capped at ₹25,000.
If you are taking the online route, eNPS contributions are chargeable at 0.20 per cent with a ₹10,000 cap. Withdrawals from NPS cost ₹500 each time.
Besides, there are account opening charges of ₹40 and annual maintenance costs of ₹60-70 to the record-keeping agency, 0.0032 per cent annually for the NPS custodian and 0.003 per cent annually for the NPS Trust.
There’s not much you can do to side-step these charges except taking the eNPS route and reducing the contribution fee.
Insurance: Steep front-loading
If there’s one financial product where fees and commission structures are wholly out of sync with others, it is insurance plans. IRDAI (the insurance regulator) does not impose limits on the costs that insurance plans can charge investors.
However, it caps the expenses that insurers can incur at the company level through what is called the EOM (Expenses of Management) limit. General and standalone health insurers are required to cap their EOM at 30 per cent and 35 per cent of their gross premium collections. For life insurers, IRDAI sets product-wise EOM limits. Term plans are allowed 100 per cent EOM in the first year and 25 per cent thereafter. Endowment and moneyback plans can spend 80 per cent in the first year and 17.5 per cent thereafter. Annuity plans have frugal EOM limits at 15 per cent for the first year and 6 per cent thereafter. Insurance firms may distribute EOMs unevenly between products.
However, the main item of cost that you need to be aware of when buying insurance is the agent commission. Agent commissions are deducted at the outset from your premium payments, with only the balance being invested on your behalf.
Insurance plans also have high front-loading of commissions. This results in commissions taking a big bite of your first premium and a smaller nibble out of your renewal premiums. In traditional plans such as endowment or moneyback policies, the agent gets to take home between 20 per cent and 48 per cent of the first-year premium and upto 7.5 per cent on renewals. In pure term plans, upto 40 per cent of the first-year premium and 5 per cent of renewals go to the agent. In ULIPs, commissions make up upto 15 per cent of first-year premium and 2 per cent of renewals.
The differing commissions are the main reason why traditional insurance plans are hard-sold to you over ULIPs or annuities. The front-loaded commission structure is also the reason why in some insurance plans, agents drop off your radar after collecting your first premium cheque. Or they actively urge you to switch to a new plan after the first couple of years.
Commissions on health insurance products vary between 7.5 per cent and 17 per cent of first-year premium and upto 15 per cent of renewals. For fire, motor and other general insurance, one-time commission ranges between 10 per cent and 28 per cent of the premium paid.
Now that you know your way around costs and commissions, we hope you can make wiser investment choices.
Published on July 19, 2025
About the Author
