What is an expense ratio in mutual funds, and how is it charged?

What is an expense ratio in a mutual fund?

An expense ratio is a mutual fund's yearly fee, shown as a percentage of your money and taken out of the fund's value. You never write a cheque for it. The fund simply keeps a small slice of its assets.

It is also called the total expense ratio, or TER. SEBI's formula for it is plain enough: the base expense ratio, plus brokerage, plus the cost of executing trades, plus taxes such as GST. We will take those parts one at a time below.

Every scheme has one. The fund house and AMFI both put it on their websites every day. A fund house is the company that runs the fund.

How is the expense ratio charged?

Each day the fund counts that day's share of the fee as money it owes, before it sets the NAV. So the price you buy and sell at already has the fee taken out. NAV is the price of one unit of the fund. There is no bill and no yearly debit from your bank account.

SEBI's rules say how this works. A fund's NAV is its investments plus its current assets, minus what it owes, divided by the number of units outstanding. Major expenses such as management fees are accrued on a day-to-day basis into that sum. Two things follow, and people get both wrong.

It is not a share of your profit. The fee is a percentage of the fund's daily net assets. Net assets means what the fund holds, less what it owes. A fund that has done nothing for a year still pays it.

It is taken in a bad year too. It comes out on days the fund falls as well as on days it rises. If the fund falls, say, 10% in a year, the fee is still charged, on the lower value.

One more consequence. Returns worked out from NAVs, which is how fund returns are published, are already after the expense ratio. The taxes inside the TER are inside those numbers as well.

How much does an expense ratio cost you in rupees?

Multiply the value of your holding by the rate. That is the whole sum.

Take ₹2,00,000 held in one fund for a full year. These fees are assumed for the example, and the value is held flat for the year to keep the arithmetic clean.

The gap between the two is ₹1,000 in the first year. At 1.5%, ₹3,000 over 365 days works out to about ₹8 a day, taken inside the NAV and never billed. It is about ₹8, not exactly ₹8, because the real charge is worked on each day's net assets, and those move.

A gap that small looks harmless in one year. It does not stay one year. Over a long holding the difference compounds, and the 15-year illustration in our guide to choosing a fund shows it in rupees. You can also try your own figures in the lumpsum calculator.

What does the expense ratio pay for?

It pays for the costs of running the scheme that SEBI lets a fund charge, and nothing else. SEBI's rules say all of a scheme's expenses must be clearly identified and paid from the scheme.

The first item is the fund house's fee for investing and advising, which has to be disclosed in the fund's offer document. On top of that, SEBI's list of recurring costs includes:

• marketing and selling expenses, including fees and charges for distributing the scheme
• brokerage on the fund's trades
• the registrar that keeps unitholder records
• what the trustees charge
• audit fees
• the custodian, which holds the fund's securities
• investor communication
• moving the fund's money between locations
• account statements and payout and redemption cheques
• insurance premium paid by the fund
• the cost of winding up a scheme that is being closed
• statutory advertisements
• storage and handling of gold and silver, for funds that hold them
• a fee to the stock exchange, if the fund is listed there
• such other expenses as SEBI specifies or approves

A small part is also set aside each year for investor education. The figure is 0.02% of daily net assets, or 0.01% for index funds and ETFs, within the base expense limits. An index fund is a fund that follows an index such as the NIFTY 50. An ETF, or exchange traded fund, is a mutual fund that tracks an index or a metal and trades on a stock exchange.

The launch is not charged to you. Everything spent on a new fund offer, up to the day units are allotted, is borne by the fund house, the trustees or the sponsor.

Who receives each part of the money is a separate story, told in how mutual fund companies make money.

What is the base expense ratio, and how is it different from the TER?

The base expense ratio is the part SEBI caps. It covers the fund house's fee and the scheme's running costs. The TER adds a few things on top, and the TER is the figure published every day.

Brokerage is the fee paid for carrying out the fund's trades. Brokerage within those two limits sits outside the base. Any brokerage above them has to fit inside the base cap.

Exchange and clearing charges are what the stock exchange and its clearing house levy on a trade. GST is Goods and Services Tax. SEBI's rules call taxes of this kind statutory levies: levies imposed by the state and central governments.

Outside the TER, an investor can also meet other statutory levies and an exit load. An exit load is a fee some funds charge if you sell within a set time after buying. Our articles on exit load and hidden fees in mutual funds cover every charge.

What limits does SEBI put on the expense ratio?

SEBI caps the base expense ratio, and for actively managed funds the cap falls as the fund grows. The limits are set as a percentage of the fund's daily net assets. Since 1 April 2026, they come from SEBI's Mutual Funds Regulations, 2026.

The next table is for open-ended, actively managed funds. An open-ended fund has no end date, so you can put money in or take it out when you choose. Here the cap works in bands. Each rate applies only to the slice of assets inside its own band.

SEBI calls a scheme equity oriented when it holds at least 65% of its net assets in shares. An index fund or an exchange traded fund is never counted as equity oriented. Index funds and exchange traded funds have their own flat cap: 0.90% for open-ended ones. Close-ended schemes are capped at 1.00% if equity oriented and 0.80% if not. Units of a close-ended fund can't be sold back to the fund house before maturity, but they are listed on a stock exchange, where you may be able to sell them to another investor. A fund of funds invests in other funds. One that puts its money in liquid schemes, index funds or exchange traded funds is also capped at 0.90%, counting the underlying funds' expenses.

A worked reading of the slab

Take an actively managed, equity-oriented, open-ended fund with ₹1,000 crore in daily net assets:

• 2.10% on the first ₹500 crore is ₹10.50 crore
• 1.90% on the next ₹250 crore is ₹4.75 crore
• 1.60% on the remaining ₹250 crore is ₹4.00 crore

That adds up to ₹19.25 crore a year at most, or 1.925% of the whole. An index fund of the same size could be charged at most 0.90%, which is ₹9 crore. Brokerage within limits, exchange charges and GST come on top of both figures.

These are ceilings, not prices. Each fund sets its own fee at or below its cap.

What is a good expense ratio?

There is no single good number. Compare a fund only with funds of the same category and type, because the ceilings are different for each. A category is SEBI's label for what a fund may hold.

An index fund's cap is a flat 0.90%. An active equity fund's cap starts at 2.10% and slides down. A fund that is not equity oriented has a lower cap than an equity one in every band. Putting a 0.5% fund next to a 1.8% fund tells you very little if they do different jobs.

A higher expense ratio does not, by itself, mean a better fund, and a lower one does not either. The returns a fund shows are already after its costs, so the fair comparison is returns against similar funds over the same period. Our pieces on active vs passive funds and ETFs vs index funds go into how the two styles differ. You can browse the index funds category or the tables on our mutual funds page to see funds side by side.

Koshex helps you choose a fund that suits your goal and timeline.

Why does a fund's expense ratio change?

The ceiling moves with the fund's size, and the fund house can change its fee within the ceiling. For an active fund the cap steps down as net assets grow, as the table above shows. So a fund's ratio can change even when nobody decides to change it.

A fund house that wants to change the base expense ratio must send investors an email or SMS three or more working days ahead, and put the change on its website by then. A change caused by the fund's size, or a cut the regulation requires, can happen without that notice.

To see today's figure, look on the fund house's website or on AMFI's, where it is published daily. Most fund houses also publish a factsheet for each fund every month. The fund's offer document also points to a web page with the last six months of TER.