A mutual fund's expense ratio (TER) is the annual fee the fund charges everyone — expressed as a percentage of the money it manages. A 2% TER means the fund keeps ₹2,000 of every ₹1,00,000 you have invested with it, every year, whether it performs well or badly. You never see a bill; the fee is quietly deducted from the NAV every day.
What the fee pays for
The TER covers the fund manager's salary and research team, administration, the registrar that maintains your units, audit and custody of securities, and distribution commissions — in a regular plan. A direct plan is the identical portfolio without the distributor commission, so its TER is lower and its NAV grows faster by exactly that gap.
Regulator SEBI caps the maximum TER funds can charge; equity funds are allowed more than debt funds, and funds are allowed to charge slightly less as they grow larger.
What 1% actually costs you
A percentage sounds harmless. Stretched over 20 years it is enormous, because the fee compounds against you in exactly the way returns compound for you.
| ₹10,000/month for 20 years @12% | Direct (0.5% TER) | Regular (1.5% TER) |
|---|---|---|
| You invest | ₹24 lakh | ₹24 lakh |
| Final value | ₹92.6 lakh | ₹83.4 lakh |
| Cost of 1% extra fee | — | ₹9.2 lakh |
Illustration at an assumed 12% gross return. Try your own numbers in the SIP calculator — at 11% instead of 12%.
That ₹9.2 lakh is not a market loss. It is a fee — paid for the same fund, holding the same shares, run by the same manager.
How to check a fund's TER
Every scheme's TER is disclosed monthly on the fund house's website and in scheme documents, and your broker app shows it under scheme details. A reasonable range for large-cap equity index funds is under 0.2%, for actively managed equity funds roughly 0.5–1.8%, and for regular plans add roughly 0.5–1% over the direct version.
You cannot control markets. You can control this number — it is the most reliable improvement available to a long-term investor.
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Message IFI on WhatsApp →Quick recap
- Expense ratio is the annual fee deducted from the fund daily — invisible but certain.
- Direct plans cost less than regular plans for the identical portfolio.
- 1% extra over 20 years can cost around ₹9 lakh on a ₹10,000 monthly SIP.
- TER is the most controllable variable in a long-term portfolio.
Frequently asked questions
What is a good expense ratio for a mutual fund?
Index funds often run below 0.2%. Actively managed direct equity plans typically charge 0.5-1.2%, regular plans about 0.5-1% more. Lower is better, all else equal - it is the one input guaranteed to work in your favour.
What is the difference between direct and regular plans?
Same fund and portfolio. Regular plans include distributor commissions in the TER; direct plans don't, so they cost less and end up worth more over time. Choose direct if you are comfortable investing without an adviser.
Is the expense ratio charged even when the fund loses money?
Yes. The TER is deducted from the fund daily regardless of performance - which is exactly why it deserves attention before investing.
Where can I find a fund's expense ratio?
On the AMC's website under the scheme's monthly disclosures, in the scheme information document, or in the scheme details section of most broker apps.