Expense ratio

The expense ratio is what a mutual fund scheme charges each year to cover fund management, administration, registrar and custody services, and distribution. It is expressed as a percentage of the scheme’s average assets and deducted in small daily amounts before the NAV is calculated. You never see a separate bill — the cost is already inside the NAV.

Why it matters

Costs compound just as returns do. A difference of one percentage point a year looks small, but over 20 years it can noticeably reduce what an investment is worth. Unlike returns, costs are known in advance and within your control when you choose between plans and schemes.

How to read it

• Compare expense ratios within a category. An actively managed small-cap fund and an index fund have very different cost structures.
• The direct plan of a scheme costs less than its regular plan, because it carries no distributor commission.
• Expense ratios change. Fund houses publish current figures and must disclose changes.

Common misconceptions

• “The lowest cost always wins.” Cost is one factor. Strategy, risk, tracking quality for index funds, and fit with your goal all matter.
• “It is charged once a year.” It accrues daily and is built into every day’s NAV.
• “A 1% cost takes 1% of my gains.” It takes about 1% of your whole investment each year, whether the fund gains or not.

In India: SEBI caps scheme expenses, with limits that step down as a scheme grows. Under SEBI’s mutual fund regulations that took effect on 1 April 2026, limits apply to a base expense ratio, with statutory levies and certain transaction costs shown separately. Check scheme documents for current figures.