Understanding expense ratios: the silent portfolio killer

A fee gets deducted from the fund's assets every single day, quietly lowering the NAV before you ever see a number. This is the expense ratio, and over a long holding period it does more to your final corpus than most investors realize.

What the expense ratio actually covers

The Total Expense Ratio, or TER, is the percentage of a scheme's assets that goes toward running it each year. This includes fund management fees, administrative costs, and, in the case of a regular plan, the commission paid to the distributor who sold the scheme. SEBI requires every AMC to publish the TER for each scheme daily, on its own website and on AMFI's website, so the number is never hidden.

SEBI also caps how high the TER can go, and the cap depends on the scheme's assets under management. Larger schemes get lower permissible limits, since running a bigger pool of money doesn't cost proportionally more.

From April 1, 2026, SEBI put a revised expense framework into effect. The new structure separates the Base Expense Ratio from statutory levies such as GST, and adds explicit disclosure of brokerage and transaction costs incurred while trading. Index funds and ETFs saw their cap reduced from 1.00 to 0.90 percent. Fund of funds with equity exposure saw their cap fall from 2.25 to 2.10 percent. The intent was to tighten costs and improve transparency.

Early data through May 2026 told a more mixed story. Industry figures on the flexicap category showed some schemes with TERs that rose rather than fell after the new rules kicked in, once brokerage and transaction costs were unbundled and reported separately. This is a reminder that a rule designed to lower cost ceilings doesn't automatically lower every fund's actual charge. The scheme's factsheet is still the only reliable place to check the current number.

Direct plans versus regular plans

A direct plan and a regular plan of the same scheme hold the same portfolio and are managed by the same fund manager. The only structural difference is the TER. A regular plan's expense ratio includes the distributor commission, typically in the range of 0.3 to 1.0 percent annually depending on the scheme, while a direct plan excludes it.

That commission is what pays for the service a distributor provides: helping with paperwork, KYC, transaction execution, tracking your folios across AMCs, and being someone you can call when a scheme merges, a nominee needs updating, or you need help making sense of a consolidated statement. Whether that service is worth the added cost is a personal call that depends on how much of this administrative work you want to handle yourself.

Why a small percentage matters over time

An expense ratio difference of even half a percentage point compounds meaningfully across a long SIP. On a monthly SIP held for two decades, a gap of roughly one percentage point in TER can translate into a difference of several lakh rupees in the final corpus, purely from the drag of the higher charge, independent of how the underlying market performs. The market return is uncertain. The expense ratio is charged every day regardless of what the market does. That asymmetry is exactly why cost is worth checking, even when it isn't the only thing worth checking.

What to actually look at

TER alone doesn't tell you whether a fund is good. A higher TER on an actively managed fund can be reasonable if the fund has a long, consistent track record of performance net of that fee. A very low TER on a fund with poor portfolio quality or high tracking error is not automatically the better pick. Compare TER within the same category and same plan type, not across categories, since an index fund and an actively managed small-cap fund were never going to charge the same amount for very different jobs.

Check three things together: the TER itself, how long the fund has been managed by its current fund manager, and how the fund's returns compare to its category average net of fees over at least five years. A scheme that looks cheap but has changed fund managers twice in three years carries a different kind of risk than the expense ratio shows.

The bottom line

The expense ratio is one of the few numbers in investing that is fully within your control, unlike market returns. It deserves a look every time you pick a scheme or review an existing portfolio, alongside the fund's mandate, its track record, and how it fits your own goals and time horizon.

Mutual fund investments are subject to market risks. Read all scheme-related documents carefully before investing.

Vijay InvestEdge Pvt. Ltd. is an AMFI-registered Mutual Fund Distributor, ARN-1777, based in Pune, Maharashtra, operating since 1994.