Mutual fund investing: What is total expense ratio?

Expense ratio is the fee or amount you pay to the mutual fund to manage your money. All the money given by investors to the fund is pooled together and invested in various assets, which earn returns for you.

However, there are various costs incurred by the fund in managing this large pool of money, and all these expenses are recovered from investors in the form of ‘expense ratio’. It’s expressed as a percentage of assets under management (AUM).

The expenses typically comprise the fund managers’ fees, marketing and distribution costs, administration charges, audit fees, brokerage, etc. You don’t pay this fee to the mutual fund separately. Expense ratio is deducted daily from the net asset value (NAV) of the fund before it is published on the AMC website.


How is it calculated?
It is calculated by dividing the fund’s total expenses by the average value of its total AUM over a year.

So, if the average value of total assets in a year is Rs.1,000 crore and the total expenses are Rs.10 crore, expense ratio will be

This means that every investor will pay 1% of his total investment to the mutual fund each year.

Is there a cap on expense ratio?
Sebi has prescribed limits for TER depending on the fund’s AUM and category. So, for the first Rs.500 crore AUM, the maximum expense ratio is 2.25% for equity funds and 2% for debt funds; on the next Rs.250 crore, it is 2% for equity funds and 1.75% for debt funds, and so on.

How does it impact returns?
The higher the expense ratio, the lower your returns. If you invest `1 lakh a year in a fund with a TER of 1.5%, you will pay `1,500 a year, which will be reduced from the returns earned by you.

However, expense ratio is not the only criterion you should consider while selecting a fund. It does not reflect a fund’s performance or indicate whether it is better or worse than others. So only if there are two comparable funds should you consider expense ratio as a deciding factor.

Direct plans have a lower TER than regular plans and, hence, are cheaper. This is because you invest directly with the AMC without any intermediaries, and this cost is reduced by the fund.