You never receive a bill for owning a mutual fund. The fund's running costs are deducted from its assets every day, and the NAV you see is already net of them. That invisibility is exactly why costs deserve attention: they compound against you just as returns compound for you.
What the expense ratio covers
The expense ratio pays for running the fund: the investment team and research, administration, registrar and custodian services and — in regular plans — distributor commission. SEBI caps what schemes may charge, and the caps vary with the type of scheme and its size.
From 1 April 2026, the SEBI (Mutual Funds) Regulations, 2026 replaced the regulations of 1996. Under the new framework, a scheme's running cost is presented as a base expense ratio, with brokerage and statutory levies — such as GST and stamp duty on the fund's transactions — accounted for separately at actual cost. The aim is clarity on what the fund house charges versus what is passed through. When you compare funds, make sure you are comparing the same measure.
The arithmetic of cost
For illustration, assume two funds earn the same gross return of 10% a year before costs. One charges 0.5% a year and the other 1.5%. ₹10 lakh is invested once:
| Years | Cost 0.5% (net 9.5%) | Cost 1.5% (net 8.5%) | Difference |
|---|---|---|---|
| 10 | about ₹24.8 lakh | about ₹22.6 lakh | about ₹2.2 lakh |
| 20 | about ₹61.4 lakh | about ₹51.1 lakh | about ₹10.3 lakh |
| 30 | about ₹1.52 crore | about ₹1.16 crore | about ₹36.6 lakh |
Over 30 years, a one-point difference in annual cost reduces the outcome by roughly a quarter in this illustration.
The gap widens with time because costs are a percentage of a growing balance: each year's cost is larger than the last, and every rupee taken out also loses all the growth it would have earned. This is compounding working in reverse.
Note: Real funds do not earn identical gross returns, and returns are never steady. The example isolates cost to show its effect; it does not predict any fund's results.
Cost versus value
A low expense ratio is not automatically better, and a higher one is not automatically worse. What matters is what you receive for it.
- Index funds and ETFs aim to track a benchmark, so cost and tracking error are the main things that separate them.
- Actively managed funds charge more for the attempt to beat the benchmark. The question is whether a fund has delivered returns above its benchmark after costs, consistently, across full market cycles — and whether you understand how. Alpha is the term for that excess.
- Regular plans include the cost of distribution, which pays for a service: help choosing, onboarding, reviewing and staying the course. Its value depends on how much of that service you use. See direct vs regular plans.
The same effect in a SIP
Costs work the same way on regular investments. For illustration, a SIP of ₹10,000 a month for 20 years at a hypothetical net 11% a year grows to about ₹87.4 lakh; at 10.25% — three-quarters of a point lower — it reaches about ₹79.1 lakh. The ₹8.2 lakh gap comes entirely from the difference in the rate, applied to a growing balance for two decades.
Where costs are easy to miss
- Fund-of-funds. A fund that invests in other funds carries the underlying schemes' costs as well as its own. Check the total expense figure the fund discloses, not just one layer.
- Trading inside the fund. Buying and selling securities has costs. A high portfolio turnover on the factsheet suggests more of them.
- Small differences that look negligible. A gap of 0.3 or 0.5 percentage points seems trivial in a single year. Run it over your actual horizon before deciding it does not matter.
What the expense ratio does not include
- Exit load: a charge on redemptions made within a set period, deducted from what you receive. It does not apply once you hold beyond that period.
- Tax on your gains: paid by you when you redeem, depending on fund type and holding period.
How to check and compare
- Find the current figure. Fund houses publish expense ratios on their websites and in the monthly factsheet; AMFI's website carries them too. The figure can change during the year.
- Compare like with like. Compare funds in the same category and the same plan type. For any scheme, the direct plan's cost is lower than the regular plan's.
- Look at the trend. Expense ratios usually fall as a scheme grows, within SEBI's limits.
- Weigh it with everything else. Use cost to separate otherwise similar options, not as the only test.
Costs are one of the few parts of investing you can know in advance. Over long periods, knowing them — and keeping them reasonable for what you receive — is a quiet but real advantage. To feel the effect, run the Lumpsum Calculator twice, lowering the assumed return by the cost difference the second time.