Question 1

What is expense ratio and how does it affect returns?

Accepted Answer

Expense ratio is the annual fee charged by a mutual fund to cover management, administration, and distribution costs, expressed as a percentage of AUM. A 1.5% expense ratio means ₹1,500 per year is deducted per ₹1 lakh invested. Over 10 years on a ₹10,000/month SIP at 14% gross return, a 1.5% expense ratio costs approximately ₹3-4 lakh in lost returns. The fee is deducted daily from NAV — you never see a separate charge.

Question 2

What is a good expense ratio for mutual funds in India?

Accepted Answer

Index funds: 0.1-0.5% is standard. Direct equity funds: 0.5-1.5% is typical. Regular plans (through distributors): 1-2.25%. SEBI caps the maximum expense ratio at 2.25% for equity funds and 2% for debt funds. Always prefer direct plans over regular plans — the 0.5-1% expense ratio savings compounds significantly over 10+ years.

Question 3

Direct vs regular mutual funds: how much do I save?

Accepted Answer

Direct plans have 0.5-1% lower expense ratio than regular plans. On a ₹10,000 SIP over 20 years at 12% gross: the direct plan (1% expense) yields about ₹89L while the regular plan (1.8% expense) yields about ₹76L — a difference of ₹13 lakh from the same monthly investment. Switching from regular to direct is one of the easiest ways to boost your returns.

Question 4

How is expense ratio calculated and deducted?

Accepted Answer

The expense ratio is calculated as a percentage of the fund's total AUM and deducted daily from the fund's NAV. If the annual expense ratio is 1.5%, the daily deduction is approximately 1.5%/365 = 0.0041% from NAV. You do not pay this fee separately — it is already reflected in the NAV you see. This is why gross return (before fees) is always higher than your actual return.

Question 5

Should I choose funds with the lowest expense ratio?

Accepted Answer

Not always. For index funds and ETFs, expense ratio is the primary differentiator — choose the lowest. For actively managed funds, a slightly higher expense ratio is acceptable if the fund consistently outperforms its benchmark after fees. A fund returning 15% with 1.5% expense (13.5% net) is better than one returning 11% with 0.5% expense (10.5% net). Judge by net-of-fees performance over 5+ years.

Question 6

How does expense ratio impact SIP vs lump sum differently?

Accepted Answer

The expense ratio impact is proportionally the same for both SIP and lump sum — it reduces the effective annual return by the same percentage. However, in absolute rupee terms, lump sum loses more to fees because the entire corpus is subject to the expense ratio from day one. SIP instalments made later have less time to be eroded by fees. Either way, lower expense ratio benefits both investment types equally.

Question 7

What is the maximum expense ratio allowed by SEBI?

Accepted Answer

SEBI caps expense ratios based on AUM: equity funds can charge up to 2.25% for smaller AUM and as low as 1.05% for very large funds. Debt funds are capped at 2% for small AUM. Index funds and ETFs are capped at 1%. These caps apply to regular plans — direct plans must be lower by the amount saved on distribution commission. SEBI periodically reviews and reduces these caps.

Mutual Fund Returns Calculator — Net of Expense Ratio