'Mutual funds charge 4.6x more than US peers': Banker warns investors aren’t noticing

Even as mutual fund SIPs hit an all-time high of ₹28,000 crore monthly, a rising concern lurks beneath the surface: investors are silently bleeding thousands in hidden costs, says investment banker Vineet Kumar.

In a hard-hitting LinkedIn post, Kumar exposes a growing mismatch in India’s mutual fund industry — skyrocketing Assets Under Management (AUM) have not translated into lower Total Expense Ratios (TER), despite promises of scale-driven efficiencies.

“TERs are rising, not falling — even as AUM has tripled,” Kumar wrote. Backed by data from 2019 to 2024, his analysis shows TERs climbing across the board: large-cap funds (1.85% to 1.95%), mid-cap (2.05% to 2.18%), small-cap (2.15% to 2.35%), and thematic funds (2.10% to 2.45%).

While these rates remain within SEBI’s legal limits, Kumar questions the lack of scale benefits. “Where are the economies of scale?” he asks.

The implications are significant. On a ₹10,000 monthly SIP over 20 years with a 12% return, a 1% TER difference could reduce gains by ₹11.26 lakh. Kumar estimates Indian investors may be losing over ₹45,000 crore annually to what he calls “excess fee extraction.”

He doesn’t stop there. Kumar accuses fund houses of inflating costs through new fund offers with identical holdings, narrowing the TER gap between direct and regular plans, and creating a cluttered scheme landscape — with some AMCs running over 100 funds.

He contrasts India’s 2.05% average equity fund TER with the U.S. average of 0.45%. “We pay 4.6x more for the same service,” he notes. Worse, 62% of active large-cap funds underperform the Nifty 50 after accounting for TER.

Sujith SS, founder of MoneyDhan.com, responded by acknowledging the issue — but with caveats. “Our first line of advisory is to shift from mutual funds to equivalent ETFs, which cost one-tenth of the TER,” Sujith said.

But he pointed to behavioral patterns. “Indians rarely hold a mutual fund for more than three years. Most exit to buy a flat and lose 10% to registration tax — way worse than any TER,” he argued.

Sujith contends mutual funds remain the “lesser evil” compared to FDs, ULIPs, and endowment plans. “TER becomes an issue only once your portfolio crosses ₹1 crore,” he added, citing a lack of financial discipline as the bigger problem.