Money Basics · SIPs & mutual funds

Expense ratio

Every mutual fund charges a fee to manage your money. This is the expense ratio. Expressed as a percentage of your assets per year, deducted daily from the fund's NAV.

You never see a deduction in your account. It's already subtracted before you see your NAV. Which is why most investors don't notice it, even as it compounds against them over decades.

What expense ratio covers

• Fund manager salary
• Research team
• Operations, compliance, regulatory filings
• Distributor commissions (in regular plans, more on this later)

SEBI limits on expense ratio

Since 1 April 2026 the cap is set on a fund's Base Expense Ratio (BER). The AMC's own fee, with brokerage and statutory levies disclosed separately on top:

• First ₹500 crore: 2.10% (equity), 1.85% (other than equity)
• As AUM grows the cap reduces, down to 0.95% for the largest equity schemes
• Index funds and ETFs: 0.90% ceiling. Good ones charge far less, 0.1–0.2%

The compounding drag

₹1 lakh invested for 30 years:

12% gross return₹29.96 lakh

11.5% (after 0.5% ER)₹26.20 lakh (₹3.8L lost to fees)

10% (after 2% ER)₹17.45 lakh (₹12.5L lost to fees)

> A 2% expense ratio costs you over ₹12 lakh on ₹1 lakh invested over 30 years. The fee is not 2%. It's 42% of your final corpus.

Direct vs regular plans

Every mutual fund has two versions:

• Regular plan: includes distributor commission. Higher expense ratio.
• Direct plan: no distributor. Lower expense ratio by 0.5–1%.

Buying straight from the AMC, or through any platform that sells Direct plans, gets you the Direct version automatically. A Regular plan is the identical fund with a distributor's commission attached, which is a fair trade only if that distributor is doing advisory work you'd otherwise be paying for separately.

The expense ratio sits on every fund's factsheet before you invest. For index funds and other passive strategies, where two funds are copying the same index, it's close to the only thing separating them.

Takeaway. Expense ratio is deducted silently from NAV every day, and across 30 years even a 1% difference runs to lakhs. Direct plans strip out the distributor commission; the question is whether you are getting advice worth that commission.