Expense Ratio in Mutual Funds: What It Costs You

You never see an expense ratio on a bill, because it is deducted daily inside the fund. That is exactly why it is easy to overlook.

What does the expense ratio cover?

It pays for fund management, administration, registrar costs, marketing and distributor commissions on regular plans. SEBI caps it based on fund type and size, and AMFI publishes every scheme’s figures. Published returns are already net of expenses.

How much can a 1% difference cost?

Is a lower expense ratio always better?

For index funds, it nearly always is, because all funds aim to deliver the same result. For active funds, cost is one factor among several, and what matters is the return after costs compared with the benchmark. A cheap fund that lags is no bargain, but all else equal, lower costs help.

Why do direct and regular plans have different ratios?

A direct plan excludes distributor commission, so its expense ratio is lower. A regular plan includes it and pays for a distributor’s service. See the full comparison.

What other costs should I check?

• Exit load: a fee on early redemption, often 1% within a set period for equity funds.
• Stamp duty: a small charge on purchases, currently 0.005%.
• Tax: switching funds counts as a sale and may trigger capital gains tax.