Quick answer: The expense ratio is the yearly fee a mutual fund charges, shown as a percentage of your investment. It’s taken out of the fund every day, so you never see a bill. The NAV you see is already after costs. Since 1 April 2026, SEBI splits it into a Base Expense Ratio (BER), which covers fund management, distribution and running costs, plus brokerage, transaction costs and statutory levies such as GST. Together these make up the Total Expense Ratio (TER). A gap of 1% looks small. Over 20 years it can cost you more than ₹14 lakh on a ₹10 lakh investment.
Last updated: 8 November 2026
How the expense ratio works
Say you hold ₹1,00,000 in a fund with a 1% TER. Over a year, about ₹1,000 is charged to the fund. It isn’t deducted in one go. The AMC accrues roughly 1/365th of it every day, and that daily cost is already reflected in the NAV.
That’s why you’ll never see “expense ratio” as a line on your statement. The only way to know what you’re paying is to check the fund’s TER.
What’s inside the expense ratio (after SEBI’s 2026 rules)
Under the SEBI (Mutual Funds) Regulations 2026, the cost is shown in parts:
| Component | What it covers | Is it capped? |
|---|---|---|
| Base Expense Ratio (BER) | Fund management fee, distributor commission (regular plans), registrar, custodian, audit and marketing costs | Yes, by SEBI, depending on fund type and size |
| Brokerage and transaction costs | The cost of buying and selling shares or bonds | Yes, separately |
| Statutory levies | GST and other government charges | Charged at actuals |
| Total Expense Ratio (TER) | The sum of all of the above |
Before April 2026, all of this was bundled into one TER figure. Now you can see how much goes to the fund house and how much goes to taxes and trading. When you compare two funds, compare TER with TER. Comparing one fund’s BER with another fund’s TER gives you a misleading answer.
Want the full story of what changed in 2026? See SEBI’s New Mutual Fund Rules 2026.
SEBI’s expense limits in 2026
The BER cap falls as a fund grows. Bigger funds must charge a lower percentage.
Actively managed open-ended funds (BER limit)
| Fund size (AUM) | Equity funds | Other funds (debt, hybrid etc.) |
|---|---|---|
| First ₹500 crore | 2.10% | 1.85% |
| Next ₹250 crore | 1.90% | 1.65% |
| Next ₹1,250 crore | 1.60% | 1.40% |
| Next ₹3,000 crore | 1.50% | 1.25% |
| Next ₹5,000 crore | 1.40% | 1.15% |
| Next ₹40,000 crore | Falls by 0.05 points for every ₹5,000 crore | Same |
| Above ₹50,000 crore | 0.95% | 0.70% |
Passive and other funds
| Fund type | Maximum BER |
|---|---|
| Index funds and ETFs | 0.90% |
| Fund of funds investing mainly in equity funds | 2.10% |
| Fund of funds investing in liquid funds, index funds or ETFs | 0.90% |
Source: SEBI (Mutual Funds) Regulations 2026, as published in Aditya Birla Sun Life MF’s expense ratio explainer. These are maximums. Many funds charge well below them.
What a 1% difference costs over 20 years
Here are two funds with the same 12% gross return a year. The only difference is cost: one charges 0.6% a year and the other 1.6%.
| Investment | TER 0.6% | TER 1.6% | You lose to the extra 1% |
|---|---|---|---|
| ₹10 lakh lump sum, 20 years | ₹86.6 lakh | ₹72.3 lakh | ₹14.3 lakh |
| ₹10,000/month SIP, 20 years (₹24 lakh invested) | ₹85.6 lakh | ₹75.9 lakh | ₹9.6 lakh |
Illustrative. Assumes a constant 12% gross return with the expense ratio subtracted every year. Real returns vary.
In the first year, the extra 1% on ₹10 lakh is just ₹10,000. The damage comes from compounding. Every rupee paid in fees is a rupee that never grows for the rest of the 20 years.
Direct vs regular plan: the biggest cost difference you control
Every fund has two plans holding the same portfolio:
- Regular plan: includes a commission paid to the distributor or advisor who helps you.
- Direct plan: no commission, so the expense ratio is lower.
SEBI requires the direct plan to have a lower expense ratio than the regular plan of the same scheme. The gap varies by fund. It’s often around 0.5–1% a year for equity funds.
So which should you choose? It depends on what the advice is worth to you. If someone helps you pick funds, rebalance and stay invested through a crash, that has real value. If you do it all yourself, a direct plan saves money. We break this down in Direct vs Regular Mutual Funds.
What is a good expense ratio?
Judge a fund’s cost against similar funds, not against the market as a whole.
| Fund type | What “low cost” usually looks like |
|---|---|
| Index funds and ETFs (direct) | Well under 0.5%. The cheapest Nifty 50 funds charge a small fraction of that |
| Large cap and flexi cap (direct) | Under about 1% |
| Mid and small cap (direct) | Under about 1% |
| Liquid and overnight funds (direct) | Usually well under 0.5% |
| Regular plans | Add the commission gap to the figures above |
These are rough guides, not SEBI limits. Check the actual peer range on the fund’s category page before you decide.
Two rules of thumb:
- For index funds, cost is almost everything. Two Nifty 50 funds hold the same stocks, so pick the lower TER with a low tracking error. See Flexi Cap vs Index Fund.
- For active funds, cost is one factor among several. A fund that charges 0.3% more but consistently beats its peers after costs can still be the better choice. Look at returns after costs over 5+ years, alongside risk measures such as the Sharpe ratio.
Where to find a fund’s expense ratio
- The AMC’s website. Fund houses publish scheme-wise expense ratios and update them when they change.
- AMFI’s website, which lists TER disclosures across all fund houses.
- The monthly factsheet and the fund page on your investing app.
Fund houses can change the TER within SEBI’s limits, and they must disclose it when they do. It’s worth checking once a year.
Common myths about expense ratio
“I’ll see it deducted from my account.” No. It’s built into the NAV every day.
“A fund with high returns must be worth its fee.” Not always. Past returns are already shown after expenses. The question is whether the fund can keep earning its fee in the future.
“Expense ratio and exit load are the same.” No. The expense ratio is charged every year you stay invested. An exit load is a one-time charge, and only if you sell early. See our guide to exit load.
“Lower is always better.” For index funds, nearly always. For active funds, a slightly higher cost can be justified by consistently better results after costs.
FAQs
What is expense ratio in simple words?
It’s the yearly fee for running a mutual fund, shown as a percentage of your investment and taken out of the NAV daily.
Is expense ratio charged every year?
Yes. It’s an annual rate, charged in small daily amounts for as long as you stay invested.
What is the difference between TER and BER?
BER is the fund’s core running cost, including the management fee and commissions. TER is BER plus brokerage, transaction costs and statutory levies like GST.
What is the maximum expense ratio allowed by SEBI?
It depends on the fund type and size. For actively managed equity funds, the BER cap starts at 2.10% for the first ₹500 crore and falls as the fund grows. Index funds and ETFs are capped at 0.90%.
Does a SIP have a separate expense ratio?
No. SIP and lump-sum investors in the same plan pay the same expense ratio.
Is the expense ratio included in the returns shown?
Yes. Published NAVs and returns are already after expenses.
Mutual fund investments are subject to market risks. Read all scheme-related documents carefully. RingMoney is an AMFI-registered mutual fund distributor (ARN-320453). All examples are illustrative. Expense limits are as per SEBI regulations in force at the time of writing and may change.
Related reading: Direct vs Regular Mutual Funds · SEBI’s New Mutual Fund Rules 2026 · What Is XIRR in Mutual Funds? · SIP Calculator
