Deepak Rao (an illustrative profile) is 42, an engineering manager in Bengaluru, with ₹10 lakh to invest for his retirement at 62. He finds two plans of the same scheme on the fund house's website. One has an expense ratio of 0.6%, the other 1.5%. "It's less than one percent," he thinks. "How much difference can it make?"
Over twenty years, quite a lot. But the cheaper plan is not automatically the right one for everyone either. This chapter shows exactly what you pay, how to put a rupee figure on it, and how to decide whether a service is worth its cost.
In this chapter
- What the expense ratio covers and how it is deducted from the NAV
- How SEBI's 2026 expense framework changed what is included
- The compounding effect of costs, worked out in rupees
- Direct vs regular plans, exit loads and the small transaction charges
What the expense ratio is and how it is charged
Every fund has running costs: fund management, research, registrar and custody fees, audit, marketing and distribution. These are recovered from the fund itself as the Total Expense Ratio (TER), an annual percentage of the fund's assets. You never receive a bill; instead, a tiny fraction is deducted every day before the NAV is calculated.
At a TER of 1.5%, a ₹10 lakh holding bears about ₹15,000 a year, or roughly ₹41 a day. Because the deduction is already inside the NAV, every return figure you see on a factsheet is net of these costs. That is fair, but it also makes costs easy to forget.
SEBI caps the TER, and the cap falls as a scheme's assets grow, because larger funds enjoy economies of scale. Index funds and ETFs usually have the lowest TERs, and actively managed equity funds the highest.
SEBI's 2026 expense framework
From 1 April 2026, SEBI restructured how fund expenses are capped. The TER is now made up of a Base Expense Ratio (BER), which covers the fund house's own costs and is subject to the slab-wise limits, plus statutory and regulatory levies such as GST, Securities Transaction Tax, stamp duty and exchange charges, which are passed through and disclosed separately.
The BER limits were also trimmed, by up to 15 basis points (0.15 percentage point) in some slabs; for example, the cap for an open-ended equity scheme with assets under ₹500 crore fell from 2.25% to 2.10%. SEBI also sharply reduced the brokerage that can be charged to a scheme on cash-market trades. For investors, the key effect is clarity: a change in tax rates no longer lets fund houses raise their own expense limits, and you can see which part of the cost is the AMC's and which is the government's.
Why small percentages become large rupees
Costs compound just as returns do, because money deducted today also loses all its future growth.
Worked example: the 20-year cost gap. Assumptions (illustrative): Deepak invests ₹10 lakh once, the portfolio earns 12% a year before costs, and he stays invested for 20 years.
- Plan with total cost of 0.5%: net growth ≈ 11.5% a year. ₹10 lakh × 1.11520 ≈ ₹88.2 lakh.
- Plan with total cost of 1.5%: net growth ≈ 10.5% a year. ₹10 lakh × 1.10520 ≈ ₹73.7 lakh.
- Difference ≈ ₹88.2 lakh − ₹73.7 lakh = about ₹14.5 lakh, from a one-percentage-point cost gap.
This does not mean you should always pick the cheapest fund. A fund that costs more but delivers meaningfully better risk-adjusted returns, or a service that stops you from selling in a panic, can be worth far more than its cost. It does mean that cost deserves a place in every comparison, especially between funds with similar mandates.
Direct and regular plans: same fund, different service
Every scheme comes in two plans that hold exactly the same portfolio, run by the same fund manager. The only difference is how you invest and what you pay for.
| Direct plan | Regular plan | |
|---|---|---|
| How you invest | Directly with the AMC or through an execution-only route | Through a mutual fund distributor |
| Expense ratio | Lower | Higher; includes the distributor's commission |
| Fund selection and asset allocation | You do it yourself | The distributor helps you shortlist suitable schemes |
| Paperwork, KYC, nominations, records | You handle it | The distributor helps you handle it |
| Reviews and rebalancing | You must remember and act | Periodic reviews and reminders |
| Behaviour in market falls | Entirely on you | Someone to talk to before you act |
| NAV over time | Higher, because costs are lower | Lower, by the cost difference |
The honest question is whether you will do the research, keep records, stay invested through a 25% fall and rebalance on time without help. Investors who will can save meaningfully with direct plans. Many investors, by their own experience, do not, and the cost of one panic sale can exceed years of commission. Money n Wealth is an AMFI-registered mutual fund distributor (ARN-121995) and earns commission on regular plans; our commission disclosure sets this out, and your consolidated account statement shows the commission paid.
Exit loads and other charges
An exit load is a charge, deducted from your redemption value, if you redeem before a stated period. It discourages short-term trading that would hurt long-term investors in the fund. For many equity funds it is around 1% if you redeem within a year. Liquid funds have a tiny graded exit load for the first six days, and many other debt funds have none. The exact terms are in the scheme documents and factsheet.
For SIPs, each instalment has its own clock. Suppose Deepak has run a ₹10,000 monthly SIP for 14 months in a fund with a 1% exit load within one year, and redeems everything. Only the units from the instalments that are less than a year old attract the load. If those units are worth ₹1,15,000, the exit load is about ₹1,150, while older units leave free of load.
| Charge | When it applies | Typical size |
|---|---|---|
| Expense ratio (TER) | Every day you hold the fund | Varies by category and size; already in the NAV |
| Exit load | Redemption before the stated period | Often around 1% in equity funds within a year |
| Stamp duty | Every purchase, including each SIP instalment | 0.005% of the amount |
| Securities Transaction Tax | Redemption of equity-oriented fund units | A very small percentage of the redemption value |
| Capital gains tax | Redemption at a gain | Depends on fund type and holding period (Chapter 5) |
Common mistakes to avoid
- Ignoring costs because they look small. As the example shows, one percentage point can mean lakhs over two decades.
- Choosing only on cost. A cheap fund in the wrong category is still the wrong fund.
- Switching plans without checking tax and exit loads. A switch from regular to direct is a redemption and can trigger both.
- Forgetting the SIP exit-load clock. Redeeming a recent SIP fully can cost more than you expect.
- Comparing TERs across categories. An index fund will always be cheaper than an active mid cap fund; compare like with like.
Try this yourself: Take your largest holding and find its expense ratio on the latest factsheet. Multiply your holding value by that percentage to get the rupee cost this year. Then ask yourself honestly what you get for it, and whether a cheaper fund in the same category, or the same fund with more support, would serve the goal better. The calculators on our planning tools page can show the long-term effect.
Frequently asked questions
Is a direct plan always better than a regular plan?
It always has lower costs, so with identical behaviour it produces a higher return. Whether it is better for you depends on whether you will choose, monitor and rebalance funds well on your own and stay invested through falls. The cost saving is real; so is the cost of mistakes made without guidance.
Where can I find a fund's expense ratio?
Fund houses disclose the TER of each plan on their websites and factsheets, and AMFI publishes TER data. Under the 2026 framework, the base expense ratio and the statutory levies are shown separately.
Do index funds have exit loads?
Some do and some do not; it depends on the scheme. Always check the scheme information document or factsheet, as exit-load terms can also change over time for new purchases.
Is the expense ratio charged even if the fund loses money?
Yes. The TER is a percentage of assets, charged daily whether returns are positive or negative. That is one more reason to consider costs alongside performance.
For a fuller discussion of the plan choice, read direct vs regular mutual funds, then continue to SIP, lump sum, STP and SWP.