The expense ratio (also called TER, Total Expense Ratio) is the yearly fee a mutual fund charges to run your money. It is shown as a percentage of your investment and taken out of the fund's NAV a little every day — you never get a separate bill.
How the Expense Ratio Is Deducted
If you hold ₹50,000 in a fund with a 1% expense ratio, the yearly cost is about ₹500. The fund deducts roughly 1/365th of that each day — about ₹1.37 a day — before publishing the NAV. The returns you see on a factsheet are already after this cost.
The fee pays for fund management, administration, registrar services, marketing and distributor commission (in regular plans).
SEBI's Limits on Expense Ratio
SEBI caps how much a fund can charge. Broadly:
- Actively managed equity funds: the cap starts at 2.25% for the smallest schemes and falls in steps as the fund's assets grow, down to about 1.05% for the largest.
- Other (debt-oriented) funds: caps are lower, starting at 2.00%.
- Index funds and ETFs: capped at 1.00%.
- Fund of funds: separate caps that include the underlying fund's cost.
SEBI reviews these limits from time to time, so check the latest circular before relying on any number. Every fund house must publish its current TER on its website, and changes must be disclosed in advance.
Direct vs Regular Plans
Every fund has two versions. The regular plan pays a commission to a distributor, so its expense ratio is higher. The direct plan has no commission, so it is cheaper — the portfolio and manager are identical. The gap is often 0.5–1.5% a year for equity funds. Read our direct vs regular plan guide for more.
Worked Example: How a Small Gap Grows
Assume an equity fund earns 12% a year before costs (an illustrative assumption, not a forecast). Compare a low-cost option at 0.5% with a high-cost option at 1.8%.
| Low cost (0.5%) | High cost (1.8%) | |
|---|---|---|
| Net yearly return | 11.5% | 10.2% |
| ₹1 lakh lump sum after 20 years | ≈ ₹8.82 lakh | ≈ ₹6.98 lakh |
| ₹10,000 monthly SIP for 20 years | ≈ ₹93.4 lakh | ≈ ₹78.6 lakh |
| Total invested via SIP | ₹24 lakh | ₹24 lakh |
That 1.3% difference costs about ₹1.84 lakh on the lump sum and roughly ₹14.8 lakh on the SIP — because the fee also eats the returns that would have compounded. (SIP figures use monthly compounding with investments at the start of each month.) Try your own numbers on the SIP calculator.
What Is a Good Expense Ratio?
There is no single "good" number — compare funds within the same category and plan type:
- Index funds and ETFs are usually the cheapest because no stock-picking is needed.
- Active large cap funds tend to charge less than small cap or thematic funds.
- A higher fee is only worth it if the fund has consistently beaten its benchmark after costs, over long periods.
How to Check a Fund's Expense Ratio
Common Mistakes
- Choosing only the cheapest fund: cost matters, but so does the category, risk and fit with your goal.
- Ignoring costs entirely: a percentage that looks tiny becomes large over 15–20 years.
- Confusing expense ratio with exit load: exit load is a one-time charge if you sell early; the expense ratio is charged every day you stay invested.
- Forgetting tax: switching from regular to direct counts as a sale and may trigger capital gains tax — see our mutual fund taxation guide.
Action Plan
FAQs
What is the expense ratio in mutual funds?
It is the yearly fee a fund charges for managing your money, shown as a percentage of your investment. It is deducted daily from the NAV, so the returns you see are already after this cost.
Is the expense ratio charged every year or only once?
It is an ongoing yearly fee, deducted in small daily amounts for as long as you stay invested. You do not pay it separately.
Why is the direct plan expense ratio lower?
A direct plan pays no distributor commission. The regular plan includes that commission, so its expense ratio is higher even though both hold the same portfolio.
What is the maximum expense ratio SEBI allows?
For actively managed equity funds the cap starts at 2.25% for small schemes and reduces as assets grow; index funds and ETFs are capped at 1%. Check the latest SEBI circular, as limits are reviewed from time to time.
Can a fund change its expense ratio?
Yes. Funds can change the TER within SEBI's limits, but they must disclose the change on their website in advance.
Is a lower expense ratio always better?
Not always. Among similar funds a lower cost is an advantage, but you should also consider the fund's category, risk, consistency and how well it fits your goal.
Sources and Update Note
Based on SEBI mutual fund regulations on total expense ratio and AMFI TER disclosures, as checked on 26 October 2026. Limits and fees change — always verify the current figure on the fund house or AMFI website.
Important Disclaimer
This article is for general education only and is not investment advice. FundGenie is not a SEBI-registered investment adviser. Mutual fund investments are subject to market risks; read all scheme documents carefully. The returns used above are illustrative assumptions, not predictions.
Did you find this useful?
