Two mutual funds can invest in similar stocks, follow the same market, and even earn similar returns. Yet the amount that finally reaches an investor’s pocket can differ. One reason is a small, often overlooked factor when choosing a mutual fund: the expense ratio.
Managing a mutual fund comes with a cost. The fund house has to research companies, manage the portfolio, execute transactions, and handle day-to-day operations. The fund recovers permitted scheme expenses from the scheme itself.
The difference may look insignificant at first. After all, what does a 0.50% difference really mean? But when your money stays invested for years, even a small recurring cost can gradually affect the wealth you accumulate.
That is why understanding the expense ratio in mutual funds matters.
Asset Management Companies (AMCs) are businesses that manage your money. Like every business, an AMC needs to meet the costs of managing and operating a mutual fund scheme. So, for every mutual fund scheme they manage, they charge a permitted expense ratio to cover the scheme’s expenses. This is commonly known as the Total Expense Ratio (TER).
Under SEBI Regulations 2026, the Base Expense Ratio (BER) covers the scheme’s core operating fees, including management fees, distributor commissions (only in regular plans), and administration costs.
On the other hand, TER includes BER and also accounts for costs such as brokerage, statutory levies, and transaction charges. This is the overall cost the scheme charges to run and manage the fund.
The TER is the annualised fee a mutual fund charges to manage your money. This annualised cost is proportionately accounted for and deducted from the scheme’s assets daily. The returns shown on your investment dashboard and NAV are already net of all expenses.
Mutual funds charge an expense ratio because running and managing a portfolio involves various recurring costs. These costs can include employee salary, administration, record-keeping, custody, audit, and other expenses associated with operating the scheme.
The scheme also needs infrastructure for accounting, investor servicing, compliance and custody. Investors usually do not pay these expenses separately. Instead, permitted expenses are charged directly to the scheme and reflected in its NAV.
This is why expense ratio and mutual fund returns are closely connected. A higher expense ratio can create a larger drag on the returns generated by the underlying portfolio.
The TER is expressed as a percentage of the scheme’s average net assets. In practical terms, the ratio tells you how much of the scheme’s assets are used to meet its permitted expenses. This TER includes the Base Expense Ratio, brokerage costs, transaction costs to execute trades, and applicable statutory levies, including GST, subject to applicable rules.
Let's take an expense ratio example: suppose a mutual fund scheme manages average assets of ₹1,000 crore and incurs ₹8 crore in expenses during the year. In this case, the scheme expense ratio would be 0.8% using the formula ₹8 crore ₹1,000 × 100
This 0.8% is expressed on an annualised percentage. However, the applicable expenses are accounted for and deducted from the scheme’s assets daily before the NAV is calculated. So, the NAV you see is already adjusted for the expense ratio.
TER reduces the portfolio’s gross return that ultimately remains for investors after expenses. Suppose two similar funds generate the same gross portfolio return; then the fund with the lower expense ratio will generally leave you with a higher return after expenses.
Consider a simple example. Suppose two funds generate a gross return of 12% a year.
| Particulars | Fund A | Fund B |
|---|---|---|
| Gross portfolio Return | 12% | 12% |
| Expense Ratio | 0.5% | 1.0% |
| Return after Expense | 11.5% | 11.0% |
The difference looks small at first. It is only 0.50 percentage points. This difference may seem small, but it adds up over time. Since these expenses reduce the amount that remains invested, you lose out on potential returns that money could have earned if it stayed invested.
Suppose you invest ₹1 lakh for 20 years and the portfolio generates a constant gross return of 12%. Ignoring taxes and other factors, a simplified comparison would look like this:
| Expense Ratio | Net Return | Value After 20 Years |
|---|---|---|
| 0.5% | 11.5% | ₹8.8 lakh |
| 1.0% | 11.0% | ₹8.0 lakh |
As you can see, the fund with a lower expense ratio creates a corpus of ₹8.8 lakh by the end of 20 years, about ₹80,000 more than the fund with a higher expense ratio. Actual outcomes can differ because mutual fund returns, assets, and expenses change over time.
AMCs offer both regular and direct plans of a particular scheme, with the same portfolio and fund manager, but different expense structures. Direct mutual fund plans generally have a lower expense ratio than regular plans because they don’t include distributor commissions.
| Feature | Direct Plan | Regular Plan |
|---|---|---|
| Distributor involved | No | Yes |
| Distributor commission | Not Included | Included |
| Expense Ratio | Lower | Higher |
| NAV | Higher | Lower |
| Investor Support | Do it Yourself | Distributor/intermediary support may be available |
For example, if the direct plan has an expense ratio of 0.6% and the regular plan has an expense ratio of 1.1%, the difference is 0.5 percentage points. This difference can affect your investment’s value over the long term because higher expenses reduce the return that remains invested.
Expense ratio and exit load are two different types of mutual fund costs. The expense ratio is a recurring cost charged to the scheme to manage and operate the mutual fund. Exit load, on the other hand, may be charged when you redeem your units within a specified period, mainly shortly after investment. Actual timeline varies from scheme to scheme.
| Parameter | Expense Ratio | Exit Load |
|---|---|---|
| Meaning | Recurring cost of running the scheme | Redemption-related charge |
| When Applicable | On an ongoing basis | When units are redeemed within the applicable period |
| How it affects investor | Reflected through NAV | Deducted from redemption proceeds |
| Purpose | Covers permitted scheme expenses | May discourage early redemption in applicable schemes |
| Applies to every redemption | Not applicable in this manner | No, depends on scheme rules |
Therefore, expense ratio vs exit load should not be treated as an either-or comparison. They represent different costs and need to be assessed separately.
There is no single expense ratio that is considered good for every mutual fund. However, understanding how the expense ratio is calculated is crucial to understanding what a good expense ratio is.
A mutual fund’s expense ratio is linked to its AUM under the slab-based BER structure. This means a smaller fund can have a higher maximum permissible BER, while the BER reduces as the fund’s daily net assets grow and move into higher AUM slabs.
For instance, an equity fund can charge up to 2.10% on the first ₹500 crore of assets. The maximum rate falls to 1.9% on the next ₹250 crore and further declines as the fund’s AUM increases. Beyond ₹50,000 crore, the maximum BER for an equity fund is capped at 0.95%.
| BER as a Percentage of Daily Net Assets | ||
|---|---|---|
| AUM Slab (₹ Crore) | BER for Equity Funds (%) | BER for Other than Equity Schemes (%) |
| Up to ₹500 | 2.10 | 1.85 |
| ₹500–750 | 1.90 | 1.65 |
| ₹750–2,000 | 1.60 | 1.40 |
| ₹2,000–5,000 | 1.50 | 1.25 |
| ₹5,000–10,000 | 1.40 | 1.15 |
| ₹10,000–50,000 | BER Reduction of 0.05% for every increase of ₹5,000 crore of daily net assets or part thereof | BER Reduction of 0.05% for every increase of ₹5,000 crore of daily net assets or part thereof |
| Above ₹50,000 | 0.95 | 0.70 |
These are maximum permissible limits, and the actual BER can be lower depending on the scheme, category, investing strategy, and operating expenses. However, the final TER can be higher due to other costs such as brokerage, statutory levies, and transaction charges.
To judge a good expense ratio, compare a mutual fund scheme’s expense ratio with similar funds in the same category.
You should not choose a mutual fund based solely on the expense ratio. A cheaper fund may not be better if it consistently delivers weaker risk-adjusted performance or lags behind comparable funds in the category.
So, before investing, consider:
Investment objective: Does the fund match your financial goal?
Fund category: Compare the scheme only with relevant peers.
Long-term performance: Look at performance across different market cycles and long-term return.
Risk: Check the fund volatility, drawdowns, and portfolio concentration.
Fund manager and process: Check who is managing the fund, the manager’s expertise, past track record, and investment philosophy.
Portfolio: Check whether the holdings match the stated strategy.
Tracking error: Particularly important for index funds and ETFs.
Expense ratio: Compare costs in the context of the fund’s overall proposition.
A fund that charges 0.30% but consistently fails to track its benchmark efficiently may not necessarily be preferable to a comparable fund charging slightly more.
The expense ratio is the annualised cost of managing and operating a mutual fund scheme. It is expressed as a percentage of net assets and is accounted for and deducted from the scheme’s assets daily. As a result, the NAV and the current value of your investment are already net of expenses.
The expense ratio may look like a small percentage on paper, but its effect can become significant when money remains invested for years. However, investors should not choose a mutual fund based solely on the lowest expense ratio.
Instead, compare costs with funds in the same category and also consider the fund’s investment strategy, risk, performance consistency, and portfolio. A lower expense ratio can help, but the right mutual fund offers a suitable balance of cost, risk, and potential returns.
Disclaimer: Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully before investing.
Ans: The expense ratio is the annualised cost of managing and operating a mutual fund scheme, expressed as a percentage of its net assets. The applicable expenses are accounted for and deducted from the scheme’s assets daily.
Ans: BER covers the core operating expenses of a mutual fund scheme, while TER is the total cost, which includes BER and other applicable expenses like brokerage, transaction charges and statutory levies.
Ans: Yes. expense ratio reduces the scheme NAV and therefore creates a drag on the returns you receive.
Ans: No, a lower expense ratio is not always better. A fund with a low expense ratio may not be better if it consistently delivers weaker risk-adjusted performance or lags behind peer funds in the category.
Ans: TER is disclosed daily and can be checked on both the AMFI and AMC websites
About the Author
Mr Shashi Kant Bahl
Mr. Shashi Kant Bahl is a mutual fund professional with nearly 20 years of experience in the financial services industry. Since 2005, he has helped over 10,000 investors manage their mutual fund investments and build long-term wealth. His firm currently manages assets of over ₹734 crore (AUM).
Disclaimer: Mutual fund investments are subject to market risks. Read all scheme-related documents carefully.
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