Expense Ratio
The expense ratio is the annual cost of running a mutual fund scheme, expressed as a percentage of its assets. It is deducted daily from the scheme, so the NAV you see is already net of these charges.
What Is an Expense Ratio?
The expense ratio is the yearly cost of managing and operating a mutual fund scheme, shown as a percentage of the scheme's average assets. If a scheme has an expense ratio of 1%, it costs roughly ₹1 a year for every ₹100 you have invested.
You never pay this as a separate bill. The scheme deducts a small portion of the expense every day, and the NAV is declared after that deduction. Your returns are therefore always net of the expense ratio.
In India, the regulatory term is Total Expense Ratio (TER). From 1 April 2026, under the SEBI (Mutual Funds) Regulations, 2026, SEBI caps a narrower figure called the Base Expense Ratio (BER), and the TER is calculated as:
TER = BER + brokerage + transaction costs + statutory levies (including GST)
How Does It Work?
- Expenses are identified. These include the AMC's investment management fee, distribution commission (regular plans only), registrar fees, custodian fees, trustee and audit fees, and investor communication costs.
- Limits apply. SEBI caps the BER based on scheme type and size (daily net assets). Brokerage has its own cap, while transaction costs and statutory levies such as GST, STT and stamp duty are charged on actuals.
- Daily accrual. The annual percentage is divided across days and deducted from the scheme's assets each day.
- NAV reflects it. The NAV is published after these deductions.
- Daily disclosure. AMCs must disclose the TER of each scheme daily on their website and on the AMFI website.
- Advance notice of increases. Any change in BER (other than changes due to AUM movement or regulatory reductions) must be communicated to investors by email or SMS at least three working days before it takes effect.
Maximum BER for open-ended equity-oriented schemes (2026 Regulations), by slab of daily net assets:
| Slab of daily net assets | Maximum BER |
|---|---|
| First ₹500 crore | 2.10% |
| Next ₹250 crore | 1.90% |
| Next ₹1,250 crore | 1.60% |
| Next ₹3,000 crore | 1.50% |
| Next ₹5,000 crore | 1.40% |
| Next ₹40,000 crore | Reduces by 0.05% for every ₹5,000 crore increase |
| Balance | 0.95% |
Other caps include 0.90% for index funds and ETFs, and 1.00% (equity-oriented) and 0.80% (other) for close-ended schemes. Non-equity open-ended schemes have a separate, lower slab table starting at 1.85%.
Practical Example
Illustrative figures only. Returns are assumptions, not predictions.
Two investors each invest ₹5,00,000 for 10 years in schemes with an identical portfolio return of 12% a year before expenses.
| Investor A | Investor B | |
|---|---|---|
| Expense ratio | 1.5% | 0.5% |
| Approximate net return | 12% − 1.5% = 10.5% | 12% − 0.5% = 11.5% |
| Value after 10 years | ₹5,00,000 × (1.105)^10 ≈ ₹13,57,040 | ₹5,00,000 × (1.115)^10 ≈ ₹14,84,973 |
Difference ≈ ₹1,27,933, caused only by a 1 percentage point cost gap. Assumptions: constant returns, expense simply subtracted from return (a simplification), no taxes or exit loads.
Daily view: On ₹2,00,000 invested in a scheme with a 1.2% expense ratio, the annual cost is about ₹2,400, or roughly ₹2,400 ÷ 365 ≈ ₹6.58 per day, deducted through the NAV.
Why Is It Important?
- Certain cost vs uncertain return: Returns vary; costs are charged every day regardless.
- Compounding effect: Small differences grow significantly over long periods.
- Plan choice: Direct plans have lower expense ratios than regular plans of the same scheme.
- Category comparison: Index funds and ETFs usually have lower costs than actively managed funds.
Key Features or Components
- Investment management fee paid to the AMC.
- Distribution commission (regular plans only).
- Registrar, custodian, trustee, audit and communication costs.
- Brokerage on trades, capped by SEBI (0.06% of trade value for cash market and 0.02% for derivatives, over and above BER).
- Transaction costs and statutory levies such as exchange charges, STT, stamp duty and GST, charged on actuals.
- Exit load is separate: it is not part of the expense ratio. See Exit Load vs Expense Ratio.
Benefits and Limitations
Usefulness
- A simple, comparable measure of ongoing cost.
- Disclosed daily, so changes are visible.
Limitations and pitfalls
- A low expense ratio does not guarantee better net returns, especially in active funds.
- The expense ratio is an annual rate; the actual rupee cost depends on your investment value over time.
- Comparing expense ratios across different categories can mislead, since costs differ by strategy.
Comparison With Related Concepts
| Concept | Meaning | Key difference | Practical implication |
|---|---|---|---|
| Expense ratio / TER | Ongoing annual cost of the scheme | Charged daily through NAV | Affects all investors continuously |
| Base Expense Ratio (BER) | Capped portion: management, distribution and operating costs | Excludes brokerage, transaction costs and statutory levies | SEBI limits apply to this figure |
| Exit load | Charge on early redemption | One-time, only if you exit within the load period | Avoidable by holding longer |
| Brokerage | Cost of buying and selling securities | Depends on portfolio trading | Higher turnover can mean higher costs |
How Does It Apply to Mutual Fund Investors?
- Scheme selection: Compare expense ratios among similar schemes in the same category and plan type.
- SIP and lump sum: The same percentage applies to both; the rupee impact grows as your corpus grows.
- Monitoring: Watch for emails or SMS about BER changes, and check the daily TER on the AMC or AMFI website.
- Direct vs regular: Weigh the lower cost of a direct plan against the value of advice and service you receive through a distributor.
Common Mistakes and Misconceptions
- "I pay the expense ratio only once a year." Correct: It is accrued and deducted daily. Why it matters: Your NAV-based returns are already reduced.
- "The cheapest fund is always the best." Correct: Cost is one factor along with strategy, risk and consistency. Why it matters: An unsuitable low-cost scheme is still unsuitable.
- "Expense ratio includes exit load." Correct: Exit load is a separate, conditional charge on redemption. Why it matters: You need to check both before investing.
- "The expense ratio never changes." Correct: It can change with AUM and AMC decisions, within SEBI's caps. Why it matters: Review notices and factsheets periodically.
Important Terms to Know
- Total Expense Ratio (TER): the full cost figure disclosed daily.
- Direct Plan vs Regular Plan: two plans with different expense ratios.
- Exit Load: a charge on early redemption.
- Assets Under Management (AUM): scheme size, which affects expense slabs.
- Portfolio Turnover Ratio: trading frequency, which affects brokerage costs.
- Index Funds: passive schemes with lower expense caps.
Key Takeaways
- The expense ratio is the annual cost of running a scheme, deducted daily through NAV.
- From 1 April 2026, SEBI caps the Base Expense Ratio; TER adds brokerage, transaction costs and statutory levies.
- Small cost differences compound into large rupee gaps over time.
- Compare costs within the same category and plan type.
- Exit load is separate from the expense ratio.
Related Glossary Terms
- Total Expense Ratio (TER)
- Exit Load vs Expense Ratio
- Direct Plan vs Regular Plan
- Active vs Passive Funds
- Net Asset Value (NAV)
- Assets Under Management (AUM)
References
- SEBI (Mutual Funds) Regulations, 2026 (amended up to 7 July 2026)
- SEBI Master Circular for Mutual Funds (20 March 2026)
- SEBI Board Meeting press release, 17 December 2025 (revised expense ratio framework)
Disclaimer
This article is for educational and informational purposes only. It is not personalised investment, tax or legal advice, and it does not recommend any specific scheme. Mutual fund investments are subject to market risks; read all scheme-related documents carefully. Rules mentioned here can change, so check the latest SEBI and AMFI updates, and consider your financial goals, risk profile and investment horizon (or speak to a qualified professional) before making any decision.
Published by FynnChintan Finserv, an AMFI-registered mutual fund distributor. Beyond Numbers. Into Opportunities.
Want to keep learning? Explore the related terms above in the FynnChintan Financial Glossary, or read more about building a financial plan around your goals.
Frequently Asked Questions
What is a reasonable expense ratio?
It depends on the category and plan. Index funds and ETFs are capped at a 0.90% base expense ratio, while open-ended equity schemes can go up to 2.10% on the first ₹500 crore. Compare a scheme with peers in the same category and plan type rather than using one number for everything.
Can the AMC increase the expense ratio after I invest?
Yes, within SEBI's limits. An increase in BER (other than due to AUM changes) must be notified to investors by email or SMS at least three working days in advance, and the notice must appear on the AMC's website.
Where can I find a scheme's expense ratio?
AMCs disclose the TER of every scheme daily on their websites and on the AMFI website. It is also shown in factsheets, the Key Information Memorandum and most investment platforms.
Is GST part of the expense ratio?
GST is a statutory levy. Under the 2026 framework it is excluded from the capped base expense ratio but included in the total expense ratio charged to the scheme.
Why does the expense ratio differ between direct and regular plans?
Regular plans include distribution commission paid to the distributor. SEBI requires a direct plan's expenses under each head to be no higher than the regular plan's, so direct plans have lower expense ratios.
This explanation is for general education only and is not investment advice. Mutual fund investments are subject to market risks; read all scheme-related documents carefully.