Expense ratio, explained

By Navprabhat K·Updated 28 July 2026·7 min read

The expense ratio is the only figure on a fund factsheet you can be certain about in advance. Returns are a forecast. Costs are a fact.

What the expense ratio actually covers

The Total Expense Ratio (TER) is the annual percentage of your invested money that the asset management company keeps to run the fund. If a fund has a TER of 1.50% and you hold ₹1,00,000 in it for a year, roughly ₹1,500 goes to the AMC rather than to you.

It bundles together several separate costs:

• •Fund management fee, which pays the fund manager and the research team. This is the largest slice in an actively managed fund.
• •Administration and registrar costs, covering record keeping, statements and investor servicing.
• •Trustee fees, audit fees and custodian charges.
• •Distributor commission, but only in regular plans. This is the entire difference between a direct and a regular plan.
• •Marketing and distribution expenses.

Two costs are commonly assumed to be inside the TER but are not: brokerage and transaction costs on the fund's own trades, and Securities Transaction Tax. Both are charged to the scheme separately, which means a fund that trades heavily costs you more than its headline TER suggests. High portfolio turnover is a hidden cost, and it does not show up in the one number everyone compares.

It is already deducted from the NAV

This trips up almost everyone at first. The expense ratio is accrued daily and taken out before the Net Asset Value is published. You will never see a line item for it, no units are deducted from your account, and no separate debit appears in your bank statement.

The practical consequence: every return figure you see for a fund is already net of the expense ratio. If a fund reports 14% for the year, that is what you got after costs. So when you compare two funds' past returns, you have already accounted for their expense ratios, and subtracting the TER again would be double counting.

Why does the number still matter, then? Because past returns tell you about a period that has ended, while the expense ratio applies to the period ahead. Two funds that both returned 14% last year, one charging 0.20% and one charging 1.80%, are not equivalent bets going forward. The cheaper one starts the next year 1.6 percentage points ahead, and the expensive one has to out-select the market by that much every single year just to draw level.

What SEBI allows a fund to charge

Indian funds cannot charge whatever they like. SEBI's Mutual Funds Regulations set a sliding cap that falls as a scheme gets larger, on the reasoning that running a fund has significant fixed costs and investors should get the benefit of scale as assets grow.

Two limits matter more than the table for most people. Index funds and ETFs are capped at 1.00%, which is why passive products in India are cheap by regulation as well as by design. And because the caps are tiered, a very large equity fund is structurally cheaper than a small one, so comparing a ₹40,000 crore fund's TER against a new ₹300 crore fund's is not a like-for-like comparison of the AMC's greed.

Direct plans versus regular plans

Every scheme in India exists in two versions. They hold exactly the same portfolio, run by exactly the same manager, with exactly the same strategy. The only difference is that the regular plan pays a trail commission to whoever sold it to you, and the direct plan does not.

That commission typically works out to somewhere between 0.50% and 1.00% a year for active equity funds. It is not a one-time fee. It is charged for as long as you hold the fund, and it grows in rupee terms as your corpus grows.

If you chose the fund yourself, based on your own research, you are paying a distribution fee for a distribution service you did not use. If a distributor or adviser genuinely helps you (keeps you invested through a crash, does your asset allocation, handles the paperwork), the commission may be fair value. What is not defensible is paying it by accident, which is what happens when you invest through a platform that quietly defaults you into regular plans.

What 1.25% costs over 20 years

Percentages this small feel harmless. The problem is that the cost compounds against you at the same rate your money compounds for you, so the gap does not grow linearly, it accelerates.

Take a ₹10,000 monthly SIP for 20 years, and assume the underlying portfolio delivers 12% a year before costs.

The difference is about ₹15.4 lakh. You invested ₹24 lakh in total, so the extra 1.25% consumed a sum equal to roughly two thirds of everything you ever put in. Nothing else about the two funds differed in this example. Same holdings, same market, same discipline.

This is why cost is the first filter rather than the last. You cannot control what the market returns and you cannot reliably predict which manager will outperform, but you can control this number completely, today, with certainty.

When a higher expense ratio is defensible

"Always buy the cheapest" is a decent default and a bad rule. There are situations where paying more is rational:

• •Small and mid-cap funds. These segments are less efficiently priced and genuinely reward research. A skilled manager has a real chance to add more than their fee here, which is much harder to claim in large caps.
• •Small or new schemes. A fund with ₹200 crore in assets is charging near the top slab because it must, not because it is gouging. If the strategy is sound, that TER should fall as the fund grows.
• •Genuinely differentiated strategies. Categories with no cheap passive equivalent cannot be replaced by an index fund, so the comparison is against other active funds in the same category, not against 0.15%.
• •You are actually being advised. If a regular plan comes with real, ongoing guidance that keeps you invested through a 40% drawdown, the commission may be the cheapest behavioural insurance you will ever buy.

What is never defensible is a high-cost large-cap fund. SEBI requires large-cap schemes to hold at least 80% of their assets in the top 100 companies by market capitalisation. That is a narrow, heavily researched, highly efficient universe, and a fund charging 1.8% to pick from it is charging a premium for a job the index does for 0.15%.

How to check a fund's expense ratio

1. The AMC's own website. Every AMC is required to publish current TERs for all schemes and plans, and to update them when they change. This is the authoritative source.
2. The Scheme Information Document and monthly factsheet. The factsheet gives you TER alongside portfolio turnover, which is the closest thing you get to a view of the trading costs that sit outside the TER.
3. AMFI. The industry body publishes TER data across schemes, which is useful when you want to compare several funds without visiting six different AMC sites.
4. Check that you are reading the direct plan's number. Aggregator sites frequently show the regular plan by default. A 0.9 percentage point error here is the entire point of the exercise.

One thing to watch: TER is not fixed. It changes as the fund's assets cross slab boundaries, and AMCs revise it within the caps. A fund that was cheap when you bought it can drift. Checking once a year is enough.

Four common mistakes

Subtracting the TER from reported returns

Already covered above, but worth repeating because it is the most frequent error. Published returns are net of TER. Do not deduct it twice.

Comparing TER across categories

A liquid fund at 0.20% and a small-cap fund at 1.70% are not competitors, and the small-cap fund is not "expensive" relative to the liquid fund. Compare a fund only against others in its own SEBI category, and against the passive alternative for that category if one exists.

Ignoring cost because the fund is a past winner

Last year's outperformance is a weak predictor of next year's. The expense ratio is a perfect predictor of next year's expense ratio. Weight your decision accordingly.

Forgetting exit load and taxes

TER is the recurring cost. Exit loads (commonly around 1% if you redeem within a year, varying by scheme) and capital gains tax are the transaction costs. Chasing a 0.30% TER saving by switching funds can easily cost you more than it saves once load and tax are counted.

Related reading: index funds versus active funds in India works through where a fee is worth paying, and how to read tracking error covers the cost that low-TER index funds can still leak. Fund Explorer shows expense ratio, returns and tracking error side by side on every fund it ranks.