What the expense ratio is
Every mutual fund charges an annual fee called the Total Expense Ratio (TER). It is deducted from the fund's assets every day, so you never see a bill; it simply lowers the NAV. SEBI caps these fees, and every fund must publish its TER on its website.
Each fund comes in two versions. A regular plan includes commission paid to the distributor who sold it to you. A direct plan is bought straight from the fund house or a direct-plan platform, without that commission, so its expense ratio is lower. The portfolio and fund manager are identical.
Worked example
Net return = gross return − expense ratio
Value = lumpsum × (1+net)^t + SIP future value at net returnShould everyone switch to direct plans?
Not necessarily. A good distributor or advisor can be worth the fee if they stop you from panic-selling in a crash or keep your plan on track. The problem is paying the higher fee without getting any real help. Ask yourself:
- Do I get regular reviews and advice, or did someone just sell me the fund?
- Am I comfortable choosing and monitoring funds myself?
- Would I stay invested during a 30% market fall without someone to talk to?
Frequently asked questions
Where can I find a fund's expense ratio?
On the fund house's website and factsheet, and on AMFI's website. Every fund must disclose its current TER.
Is a lower expense ratio always better?
Between the direct and regular versions of the same fund, yes. Across different funds, look at net returns and consistency, not cost alone.
Do index funds have lower expense ratios?
Yes. Index funds and ETFs usually have much lower expense ratios than actively managed funds because they just track an index.
Official references: AMFI – Total expense ratio of schemes