Hello everyone, I often hear about expense ratios when investing in mutual funds, but I don’t really understand them. What exactly is a mutual fund’s expense ratio? Can someone explain please?
That is very important question as many investors don’t know how much expense ratio affects their returns.
What is a Mutual Fund’s Expense Ratio?
Expense ratio is the annual fee which you have to pay to mutual fund to manage your money. It is shown as a percentage of your total investment. This fee covers fund management, administration and other operating costs.
How it works
- If a mutual fund has an expense ratio of 1%, it means ₹1,000 will be charged every year for every ₹1,00,000 you invest.
- If the expense ratio is higher then the more it eats into your returns.
- Direct plans mostly have a lower expense ratio than regular plans as they don’t involve distributor commissions.
Why Expense Ratio Matters
- Lower expense ratio means more returns in your pocket
- After long periods even a small difference (like 0.5%) can create a big gap in your wealth.
- Best for long-term investors to prefer funds with lower expense ratios
Expense Ratio Comparison
| Fund Type | Average Expense Ratio | Investment (₹10,00,000) | Annual Cost (₹) |
|---|---|---|---|
| Direct Equity Fund | 0.80% | 10,00,000 | 8,000 |
| Regular Equity Fund | 1.60% | 10,00,000 | 16,000 |
| Debt Fund (Direct) | 0.40% | 10,00,000 | 4,000 |
| Debt Fund (Regular) | 1.00% | 10,00,000 | 10,000 |