The expense ratio (TER) is the annual fee a mutual fund charges to run the scheme. It is deducted from the fund’s returns every day, so even a small difference compounds over time.
Net return ≈ Gross return − Expense ratio. Lower TER = more money stays invested for you.
What exactly is included in TER?
Direct vs Regular plans
Direct plans are bought without a broker; they usually have a lower TER. Regular plans include distributor commission, so TER is higher. Both invest in the same portfolio.
Real impact: an example
Assume both funds earn the same gross return of 12% p.a. for 10 years on ₹1,00,000 invested once.
| Option | Expense Ratio | Net Annual Return | Value after 10 years |
|---|---|---|---|
| Fund A (Direct) | 0.80% | ≈ 11.20% | ₹2,89,100 |
| Fund B (Regular) | 1.80% | ≈ 10.20% | ₹2,64,129 |
Difference: ₹24,971 lost to higher expenses on just one lakh over 10 years. Larger amounts and longer periods widen the gap.
Typical TER ranges (indicative)
- Index funds / ETFs (Direct): ~0.10% – 0.40%
- Debt funds (Direct): ~0.10% – 0.60%
- Active equity (Direct): ~0.50% – 1.25%
- Regular plans: usually ~0.5%–1.0% higher than Direct
Ranges vary by scheme size (AUM) and category. Always check the latest Scheme Information Document/factsheet.
How to keep costs low
- Prefer Direct plans if you don’t need distributor services.
- For core holdings, consider index funds/ETFs with very low TER.
- Review TER periodically. If a fund’s TER rises meaningfully, reassess.
- Larger funds (higher AUM) often enjoy economies of scale and lower TER.
FAQs
Is a lower TER always better?
Lower cost is good, but do not ignore fit, risk, and consistency. For active funds, pay only when the process and track record justify it.
When is TER deducted?
Daily. The NAV you see is after deducting expenses; you never pay TER separately.