What Is Expense Ratio in Mutual Funds and Why It Silently Eats Your Returns
There’s a cost built into every mutual fund you own. It runs every single day. It doesn’t appear as a deduction in your account. It doesn’t show up as a line item on any statement. And it gets charged regardless of whether the market goes up or down.
This is the expense ratio. And most investors either don’t know it exists or assume it’s too small to matter.
It’s not too small to matter. On a ₹10,000 monthly SIP over 20 years, a 1% difference in expense ratio costs you approximately ₹13.5 lakh in final corpus. That’s not a rounding error. That’s a car, or two years of a child’s college fees.
Here’s what the expense ratio is, how it actually works, and what changed in 2026 that every mutual fund investor in India needs to know.
What this article covers
What is expense ratio?
The expense ratio — also called the Total Expense Ratio or TER — is the annual fee a mutual fund charges to cover its operating costs. It includes the fund manager’s fees, administrative expenses, marketing costs, registrar fees, custodian fees, and audit fees.
It’s expressed as a percentage of the fund’s average assets under management (AUM). The formula is straightforward:
Expense Ratio = (Total annual expenses / Average AUM of the fund) x 100
So if a fund has ₹600 crore in assets and spends ₹12 crore annually to run itself, the expense ratio is 2%.
Every fund has one. Every investor pays it. The difference between a good fund and a mediocre one, at the same gross return, is often this number.
How it actually gets charged — this surprises most people
Most people assume the expense ratio is deducted when they redeem their investment — like a fee at the exit. It isn’t.
The TER is charged every single day before the NAV (Net Asset Value) is declared. The fund house deducts the day’s share of the annual expense from the scheme’s assets, and only then announces the NAV.
This means the NAV you see on Groww or Zerodha Coin every evening is already net of the expense ratio. The returns you track are the returns after the fund has taken its cut.
Three common misconceptions corrected:
- The expense ratio is NOT charged at redemption. It’s charged daily, invisibly, before NAV is declared.
- The returns you see on any platform are already after expense ratio. You don’t subtract it again.
- The expense ratio is charged regardless of fund performance. A bad year doesn’t waive the fee.
The SEBI 2026 regulations — what changed from April 1, 2026
This is the most significant update to mutual fund expense regulations in India since 1996. SEBI approved the new framework on December 17, 2025, and it came into effect on April 1, 2026.
The key changes:
New TER structure — Base Expense Ratio + Actuals: Previously, the TER was one all-inclusive number covering management fees, operating costs, taxes like GST, STT, and stamp duty. From April 1, 2026, the TER is split. The Base Expense Ratio (BER) covers management and operating costs. Statutory levies like GST, Securities Transaction Tax, and stamp duty are now charged separately at actual amounts. This makes the true cost more transparent.
Lower caps on index funds and ETFs: The TER cap for index funds and ETFs has been reduced from 1.00% to 0.90%. In practice most index funds already charge far less (0.04% to 0.15% for direct plans), but the regulatory ceiling coming down signals SEBI’s intent to keep passive fund costs low.
Lower caps on other categories: Fund of Funds investing in equity-oriented schemes: reduced from 2.25% to 2.10%. Close-ended equity schemes: reduced from 1.25% to 1.00%.
Brokerage limits slashed: When funds buy and sell stocks, they pay brokerage. SEBI cut the brokerage cap for cash market transactions from 12 basis points to 6 basis points (0.12% to 0.06%). Derivative transaction brokerage cap: from 5 bps to 2 bps. Lower brokerage = lower operating costs = lower effective TER.
Exit load TER benefit removed: Previously, funds were allowed to charge an additional 0.05% TER if they had exit loads on the scheme. This allowance has been removed under the 2026 framework.
The combined effect of these changes: lower effective costs for investors over time, and more transparency about what you’re actually paying for.
Expense ratios in 2026 — actual numbers by category
Data verified from AMFI and AMC factsheets as of March 28, 2026 (RupayWise):
| Fund category | Direct plan TER range | Regular plan TER range | Typical gap |
| Nifty 50 index funds | 0.04% – 0.26% | 0.30% – 0.50% | ~0.25–0.35% |
| Active large-cap equity | 0.55% – 0.80% | 1.20% – 1.80% | ~0.60–0.80% |
| Active mid-cap equity | 0.60% – 0.90% | 1.50% – 2.00% | ~0.80–1.00% |
| Active small-cap equity | 0.60% – 1.00% | 1.50% – 2.10% | ~0.80–1.00% |
| Liquid funds | 0.08% – 0.20% | 0.20% – 0.40% | ~0.15–0.25% |
| Debt / bond funds | 0.15% – 0.50% | 0.50% – 1.00% | ~0.30–0.50% |
| ELSS funds | 0.60% – 1.00% | 1.50% – 2.25% | ~0.80–1.00% |
The direct plan column is what you pay when you invest through Groww, Zerodha Coin, INDmoney, or directly through the AMC’s website. The regular plan column is what you pay when you invest through a bank, financial advisor, or distributor. The gap is their commission.
Direct vs regular plan — the difference that compounds for decades
This is the single most important expense ratio decision you’ll make as a mutual fund investor. And most people who invest through their bank or a traditional advisor are on the regular plan without knowing it.
Let’s use the numbers from the RupayWise expense ratio dataset (verified March 28, 2026). On a ₹10,000 per month SIP over 20 years at 12% gross return:
| Plan | TER | Corpus after 20 years | Difference |
| Direct plan | 0.50% | ₹98.9 lakh (approx) | — |
| Regular plan | 1.50% | ₹85.4 lakh (approx) | ₹13.5 lakh less |
The 1% TER difference costs you approximately ₹13.5 lakh over 20 years. That’s nearly 14% of your total wealth handed over to intermediaries who may or may not have added value to your investment decisions.
To put it differently: if your bank relationship manager puts you in regular plan funds, they earn a 0.5% to 1% annual commission on your entire portfolio. Every year. For as long as you stay invested. Even if they never call you again after the first meeting.
Always invest in direct plans. The platforms that offer only direct plans: Groww, Zerodha Coin, INDmoney, Kuvera, PayTM Money. If the platform or advisor hasn’t specifically told you it’s a direct plan, assume it’s regular and check.
How to check the expense ratio of a fund you already own
Three places to find it:
AMFI website: Go to amfiindia.com. Under ‘Research’ or ‘NAV History’, search your fund name. The TER is disclosed daily and is publicly available for every scheme.
Your investment platform: On Groww or Zerodha Coin, click on any fund — the TER is shown in the fund details section. If you’re on a regular plan, you’ll see a higher number than the direct plan equivalent.
AMC website: Every fund house — HDFC Mutual Fund, SBI Mutual Fund, Nippon, UTI — publishes daily TERs on their website as mandated by SEBI.
Check both the direct and regular TER for any fund you’re in. If you’re paying the regular plan rate, consider switching to direct. Most platforms allow switching without exit load implications if you’ve held for more than a year, but verify your specific fund’s terms.
Is a lower expense ratio always better?
Mostly yes, but with an important nuance.
For index funds, the answer is an unqualified yes. All Nifty 50 index funds track the same index. The only meaningful difference between them is the TER and tracking error. Lower cost wins.
For actively managed funds, the question is whether the fund manager’s skill justifies the higher cost. An active fund charging 0.80% that consistently delivers 14% annual returns beats a 0.15% index fund delivering 12%. But here’s the problem: most active large-cap funds in India have not beaten their benchmark index consistently over 10-year periods after accounting for TER. This is why index funds have become the default recommendation for most salaried investors starting out.
The practical rule: for any fund you’re comparing, adjust the returns for TER before deciding. A fund showing 13% returns with a 1.5% TER is actually delivering 11.5% gross return to the scheme. A fund showing 12% returns with a 0.5% TER is delivering 11.5% gross. They’re identical in skill — but one charges you three times more for it.
Five things you might not know about expense ratio
1. The expense ratio changes over time: It’s not fixed. As a fund’s AUM grows, SEBI’s slab structure means larger funds are required to reduce their TER. A fund that charged 1.8% when it had ₹500 crore in AUM may charge 1.6% now that it has ₹5,000 crore. Check periodically.
2. Direct plans are cheaper not because the management is different: The same fund manager runs both the direct and regular plan of a scheme. The portfolio is identical. The only difference is the distributor commission is absent in the direct plan. You get the same manager, same portfolio, lower cost.
3. Exit load is separate from expense ratio: These are two different charges. Exit load is a one-time charge on premature redemption (usually 1% if you redeem equity funds within a year). The expense ratio is a recurring annual cost. They’re often confused but are completely separate.
4. Liquid fund TERs are very low by design: Because liquid funds hold short-term debt instruments and are used as
Because liquid funds hold short-term debt instruments and are used as emergency fund parking, their TERs are already very low at 0.08% to 0.20% for direct plans. The lower cost is priced into the category by design.
5. SEBI’s B30 additional TER is still in abeyance: SEBI used to allow funds to charge an additional 0.30% TER for inflows from cities beyond the top 30 (B30 cities). This benefit has been kept in abeyance since March 2023 and has not been reinstated under the 2026 regulations.
What to do right now
- Log into your Groww, Zerodha Coin, or INDmoney account and check whether your funds are direct or regular. Look for ‘Direct’ in the fund name.
- If you’re on regular plans, check the TER gap versus the direct equivalent. If it’s above 0.5%, consider switching.
- For any new fund you invest in from today, go only direct. The platforms mentioned above default to direct plans.
- If you’re comparing two active funds in the same category, adjust for TER before comparing returns. Net return = reported return (which is already post-TER, so no adjustment needed — but compare TER separately as a cost consideration).
- For index funds specifically: pick the one with the lowest tracking error first, then the lowest TER. Both UTI and Nippon Nifty 50 direct plans are well under 0.30% — both are fine choices.
The expense ratio doesn’t feel like a big deal in year one. It’s a decimal. It doesn’t appear on your statement. Nothing seems to happen.
What happens is compounding — in reverse. Every year, that small percentage eats into your returns before they compound. And over 20 years, the compounding of the missing returns adds up to lakhs.
The good news is the fix is simple: go direct, stay direct, and check the TER of every fund before you invest. That one habit, maintained consistently, adds more to your final corpus than most ‘smart’ investment decisions people spend hours agonising over.
Related reading on The Salary Investor:
• Best Index Funds in India for Beginners in 2026 — Stop Overcomplicating This
• SIP vs PPF: Which One Should a Salaried Person Pick?
• Emergency Fund India 2026: How Much Is Enough and Where to Keep It
• What Happens to Your Money If You Never Invest It — The Real Cost of Doing Nothing
Disclaimer: Expense ratio figures for fund categories are from RupayWise (verified March 28, 2026, sourced from AMFI and AMC factsheets) and are indicative ranges subject to change. Individual fund TERs change as AUM fluctuates and SEBI regulations evolve. The SEBI (Mutual Funds) Regulations 2026 framework cited is from the official SEBI circular approved December 17, 2025, effective April 1, 2026, as reported by CafeMutual (February 17, 2026) and INDmoney (December 22, 2025). SIP corpus calculations are illustrative estimates based on the RupayWise dataset at 12% gross returns. Actual returns and costs will differ. This article is for general educational purposes only and does not constitute investment advice. Please consult a SEBI-registered investment advisor before making mutual fund investment decisions.
Sources:SEBI (Mutual Funds) Regulations 2026 — new TER framework effective April 1, 2026 (CafeMutual, February 17, 2026) · SEBI Mutual Fund Regulations 2026 — index fund TER cap reduced to 0.90%, full breakdown (INDmoney, December 22, 2025) · Average expense ratios — index funds 0.04–0.15%, active equity 0.55–0.70%, direct vs regular gap 0.30–0.95% (RupayWise, verified March 28, 2026, sourced from AMFI and AMC factsheets) · NAV declared after TER deduction — returns seen are returns received (PrimeInvestor, July 2025) · TER explanation, formula, and SEBI limits — AMFI official (AMFI India, official) · TER charged daily, not at redemption — Zerodha Varsity (Zerodha Varsity, February 2026)
He figured out most of what he knows about personal finance not from courses or advisors, but from years of reading, making mistakes, and fixing them. The Salary Investor is his attempt to save other salaried Indians the same time and money.
He is not a CA or a SEBI-registered advisor. He writes as a fellow salaried person who has been in the trenches — navigating EPF, ITR, 80C, salary slips, and market volatility.