What is Expense Ratio
The expense ratio is the annual fee charged by the mutual fund. It covers the AMC's management fees, marketing costs, and distributor commissions (for Regular plans).
How It Works
- Deducted daily from the NAV (not as a separate charge)
- A 1.5% annual expense ratio = ~0.004% deducted from NAV each day
- You never "see" the charge — it's reflected in a slightly lower NAV growth
SEBI's Expense Ratio Caps
SEBI limits maximum expense ratios based on fund type and AUM:
| AUM Slab | Max ER (Equity) |
|---|---|
| First ₹500 Cr | 2.25% |
| Next ₹250 Cr | 2.00% |
| Next ₹1,250 Cr | 1.75% |
| Above ₹50,000 Cr | 1.05% |
Why It Matters: The Compounding Effect
| Expense Ratio | Value After 20Y (₹10K/mo SIP, 12% gross) |
|---|---|
| 0.3% (Index) | ₹97.3L |
| 1.0% (Direct) | ₹89.2L |
| 1.5% (Regular) | ₹83.7L |
| 2.0% (High) | ₹78.5L |
Rule of Thumb
- Index funds: 0.1-0.3% — excellent
- Active Direct plans: 0.5-1.0% — acceptable
- Regular plans: 1.5-2.0% — consider switching to Direct
- Above 2%: Too expensive — almost never justified