Mutual FundsBeginner
Expense Ratio
The annual percentage of your investment that a fund charges to run the scheme.
Detailed explanation
It covers fund management, administration and distribution. The charge is not billed separately — it is deducted daily from the fund's assets, so the NAV you see is already net of it. Direct plans exclude distributor commission and therefore carry a lower ratio than regular plans.
Formula
Expense ratio = Total annual fund costs / Average assets under management
Example
On ₹5,00,000 invested, a 1.8% ratio costs ₹9,000 a year versus ₹3,500 at 0.7% — a ₹5,500 annual difference that itself compounds.
Why it matters
Costs are the one variable you can control with certainty. Over 20 years a 1% gap can consume a fifth of the final corpus.
Key points
- Already reflected in the published NAV.
- Direct plans are cheaper than regular plans for the same portfolio.
- Index funds and ETFs usually charge the least.
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Educational content only. Definitions and examples are illustrative and are not investment, tax or legal advice.