Most FoF schemes report only the expense ratio of the “wrapper", which is the cost of running the FoF. However, FoFs have other funds as their underlying, which in turn charge an expense ratio. The true expense ratio of an FoF is the wrapper cost plus the weighted expense of the underlying schemes they invest in.

Take, for example, the SBI Gold Fund (Direct). Popular mutual fund comparison site Value Research lists its total expense ratio (TER) as 0.1%, the lowest for the gold FoF category. However, the underlying gold ETF that this fund feeds into has an expense ratio of 0.73%, pushing the actual cost to 0.83%, and making it the third most expensive option among 17 gold FoFs.

On the same site, DSP MF's Gold FoF shows a TER of 0.65%, which seems to be the highest. However, it adds the cost of the underlying fund that it feeds into while calculating the ratio, making it the cheapest.

The data, fetched on 30 April 2025, shows SBI Gold FoF manages ₹3,921 crores, and DSP Gold FoF ₹85 crores.

“Direct investors mostly look at expense ratios while choosing FoFs like gold and silver, as there is no active management involved, and the cost becomes a deciding factor. Lack of standardized reporting mechanism of TER in such funds can be particularly confusing for DIY (do it yourself) investors," said Alekh Yadav, director at Sanctum Wealth Management.

Also Read: How are different fund of funds taxed?

Grey zone

The Securities and Exchange Board of India (Sebi) mandates that the scheme information documents (SID) and advertisements for FoFs must disclose the expenses of the underlying scheme apart from the wrapper cost. However, Sebi does not mandate disclosing the exact expenses of the underlying schemes in periodic factsheets and only mentions that disclosure be given that the underlying scheme expenses are applicable.

According to chapter 5.8.1.3 of Sebi's master circular, FoFs need to disclose the underlying scheme’s TER in the scheme information documents/key information memorandum (KIM).

Experts say common investors hardly know that such documents exist, let alone read them. There is no mention of making it mandatory on the Amfi website and the factsheet, which is commonly used by retail investors.

Most AMCs, including HDFC AMC and Kotak AMC, give a disclaimer but do not disclose the TER of the underlying schemes in their factsheet for gold ETF FoF. Fund houses like ICICI Pru disclose the underlying schemes' total expense in the factsheet along with the wrapper cost.

“Current regulations do not require disclosure of the expense ratio of underlying funds in the factsheets, though it is mandatory to disclose it in scheme documents like SID / KIM or KID," said Devang Chawda, senior product manager at DSP Asset Managers. “In the spirit of full transparency, we voluntarily disclose the total expense ratio, including that of underlying funds, across all investor communications to reflect total cost borne by the investor."

Even when the SID discloses the TER of the underlying schemes, it can be hard for retail investors to decode it. SID shows expenses charged by each underlying scheme, and if the FoF has multiple underlying schemes, the investor needs to tally the total expense by doing a weighted average calculation of all schemes. FoF category, like an asset allocator, can have multiple underlying schemes.

According to the AMFI website, total TER (including underlying) in respect of FoF investing liquid schemes, index funds & ETFs has been capped at 1%. That of FoF investing in equity-oriented schemes has been capped at 2.25%, and FoFs investing in other schemes than those mentioned above have been capped at 2%.

Queries sent to Sebi on Wednesday did not elicit any response, while SBI MF declined to comment on the matter.

Also Read: Fund houses suggest these four tweaks to make mutual funds even more sahi

How to fix this

Currently, most mutual fund comparison platforms show only one TER—usually the wrapper cost—because that’s what AMCs report. This leaves investors unaware of the scheme's true cost.

Manuj Jain, co-founder of ValueMetrics, said the market regulator should standardise reporting of FoF expense ratios and, in the spirit of full transparency, it can push AMCs to mandate disclosure of the total expense ratio of FoF schemes, as that is the true expense that an investor incurs.

Such a rule would also empower third-party comparison sites to fetch and display accurate, complete expense data, helping investors make better-informed decisions.

Also Read: Should you diversify your portfolio by adding mutual funds focused on quality strategy?