Expense Ratio in Mutual Funds: What It Is and What It Costs You

The expense ratio is the yearly fee a mutual fund charges, shown as a percentage of your investment. In a mutual fund, this expense ratio comes out of the fund's assets a little each day, so the NAV you see is already net of it. You never get a separate bill.

Mutual fund expense ratio explained

A fund needs money to run: fund management, administration and other operating costs. The expense ratio is the yearly total of those costs, expressed as a percentage of the assets in the fund. The total expense ratio (TER) is the all-in figure a fund reports for this charge.

Because the charge is taken daily, it sits inside the net asset value of the fund. A fund's NAV on any day already has the day's share of the expense ratio deducted, so the return you see is a return after cost. Regular plans also include distributor commission in this figure, which is covered below.

The charge sits inside your returns

The charge never appears as a line item in your account. Suppose you hold ₹1,00,000 in a fund with a 1% expense ratio. The charge is about ₹1,000 a year, or about ₹2.74 a day. These are illustrative figures, with the NAV assumed flat for simplicity.

Small daily amounts add up because the charge is taken every year from a balance that keeps growing or shrinking. That is why the difference between two ratios matters more over long periods than it first appears.

Rules on expense ratios from 1 April 2026

From 1 April 2026, the SEBI (Mutual Funds) Regulations, 2026 changed how the expense ratio is built. As of October 2026, it has three parts: a Base Expense Ratio (BER), brokerage on trades, and statutory levies and transaction costs charged at actual cost. The older single ratio with fixed slabs no longer applies.

The BER limit falls as a fund gets bigger, so larger funds have lower caps. The limits for open-ended schemes are below.

Data note: Limits as of October 2026, under the SEBI (Mutual Funds) Regulations, 2026. On the next ₹40,000 crore after these slabs, the limit falls by 0.05% for every ₹5,000 crore before the balance rate applies. These are ceilings, not the charge any fund actually levies.

Two more limits apply. Index funds and ETFs are capped at 0.90%. Brokerage sits on top of the BER, at most 0.06% of trade value for cash trades and 0.02% for derivatives.

Cost of the expense ratio over 20 years

Suppose ₹10,00,000 is invested once, and the portfolio earns an assumed 12% a year before costs. The values below are after each expense ratio.

Data note: Illustrative figures at an assumed 12% a year before costs. Shortfall is measured against the 0.5% fund.

The 1% fund ends about ₹7.59 lakh below the 0.5% fund after 20 years, and the 2% fund about ₹20.94 lakh below. Nothing in the fund changed to cause this gap. The difference is the yearly charge compounding against you.

Direct and regular plans carry different ratios

Every mutual fund scheme is offered as a Direct plan and a Regular plan. The portfolio is the same, but a Regular plan pays a distributor commission out of the expense ratio, so its ratio is higher. A Direct plan carries no distributor commission, so its ratio is lower. Over long periods, that gap compounds in the same way as the table above. The difference between the two plans is worth checking before you invest.

Judging an expense ratio fairly

There is no single number that makes an expense ratio good. Judge it against the fund's peers and its results instead.

A fund with a lower ratio can still lag its category, and a higher-cost fund can deliver more after costs. Treat the expense ratio as one input alongside consistency, mandate and the fund's size.

Frequently asked questions

Is a lower expense ratio always better?

Usually cost matters, but not alone. A lower expense ratio keeps more of the return in your pocket. Yet a cheap fund can still lag its category if its strategy or stock selection is weak, so compare cost and after-cost returns together.

Do I pay the expense ratio separately?

The expense ratio is not billed separately. It is deducted from the fund's assets every day, so the NAV already reflects it. You feel its effect only through the fund's returns, which are already shown after the charge, so there is nothing extra to pay.

What is the difference between TER and expense ratio?

They refer to the same charge. TER, or total expense ratio, is the all-in figure a fund reports. Since 1 April 2026, it is built from the base expense ratio, brokerage and statutory levies, each capped or charged at actual cost under the rules described above.

Why do index funds have lower expense ratios?

An index fund copies a benchmark rather than choosing stocks, so it needs less research and fewer trades. The rules from 1 April 2026 cap index funds and ETFs at 0.90%.