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Expense Ratio

Expense ratio is the annual fee a mutual fund or ETF charges to run the scheme. It is expressed as a percentage of the assets under management (AUM) and is automatically deducted from your fund value, so you do not pay it separately.

For everyday investors, it is the simplest way to compare the cost of keeping money in different funds. Funds with lower expense ratios can deliver more of the market’s return to you, especially when your investment horizon is long.

Expense ratio = Total annual operational cost ÷ Average assets under management.
Every ₹100 you invest is trimmed by a few paise to cover the fund house’s expenses before your returns are calculated.

Key aspects of expense ratios

  • Broad coverage: The ratio includes fund manager fees, oversight, custodial charges, trustee fees and marketing costs that keep the scheme running smoothly.
  • Visible on the fact sheet: Mutual fund houses publish expense ratios alongside performance data. ETFs usually list it as “expense ratio” or “ter” (total expense ratio).
  • Different for equity, debt and hybrid: Equity funds tend to cost more due to active research, while index funds and ETFs keep the fee low since they track benchmarks.
  • Applies even to SIPs: The ratio is calculated daily and reduces the NAV every day, so both lumpsum and SIP investors effectively bear the same percentage charge.

How the cost is calculated

The fund’s administrator adds up salaries, research, compliance, registrar, distribution and other operational costs. The total is divided by the average AUM to arrive at a percentage. Since AUM can grow, the ratio tends to shrink slightly over time unless new costs are introduced.

Expense ratios are expressed as an annual charge, but the deduction happens daily. A 1.2% expense ratio slices off roughly ₹1.20 for every ₹100 invested over a year before you receive your return. No extra invoice is raised; the NAV you see already reflects the net value.

Lower vs higher expense ratios

Passive funds

Index funds and ETFs simply mirror a benchmark and therefore avoid active research costs, so their ratios usually stay below 0.5%.

Active funds

Fund managers who pick stocks, rebalance and try to outperform the benchmark charge more, often 0.6% or higher (not always). You pay the premium for their expertise.

Value of comparison

Compare funds within the same category. A small difference like 0.3% vs 0.9% can compound into tens of thousands of rupees over decades.

How to factor it into decisions

  • Prioritise minimal fees for passive core holdings. Long-term index funds or ETFs should be the cheapest part of your portfolio.
  • Pay for active skill selectively. If you invest in a fund that aims to beat the market, ensure its excess return justifies the higher ratio.
  • Watch the trend. Expense ratios can rise if a fund hires additional advisors or spends on marketing. Check the fund fact sheet annually.
  • Use ratio with other checks. Expense ratio alone doesn’t guarantee quality; consider consistency, fund manager tenure and the strategy.

Things to keep in mind

  • Exit loads are separate: Some funds may still charge a small exit fee. The expense ratio is an ongoing running cost, not a one-time exit charge.
  • Expense capping: SEBI caps the total expense ratio for funds; still, the actual rate within that limit matters.
  • Check across houses: Similar funds from different AMCs can have different expense ratios even for the same benchmark.