Expense Ratio
The expense ratio refers to the annual cost of running a mutual fund, expressed as a percentage of average AUM. It is deducted from NAV daily — investors do not pay it separately; the quoted NAV already reflects this deduction.
What It Covers
- •Investment management fee — paid to the fund manager
- •Administrative costs — record-keeping, customer service, compliance
- •Distributor commissions — for regular (non-direct) plans
- •Registrar and transfer agent fees
Direct vs. Regular Plans
| Plan | Expense Ratio | Purchase Channel |
|---|---|---|
| Direct | Lower | Investor buys from AMC directly |
| Regular | Higher | Distributor/broker involved |
The difference can range from 0.5% to 1.5% per year. Over long horizons, this compounds significantly on the ending corpus.
SEBI Limits
SEBI prescribes maximum expense ratio slabs based on AUM size. Equity funds can charge up to 2.25% for the first ₹500 crore of AUM, stepping down as AUM grows. Debt funds have lower ceilings.
Impact on Returns
If a fund generates 12% gross returns with a 1% expense ratio, the investor receives approximately 11% net. Over 20 years, even a 1% annual difference reduces the final corpus meaningfully due to compounding.
Expense ratios are disclosed in the Scheme Information Document (SID) and updated on AMC websites regularly.