- How is the Expense Ratio Calculated?
- How Do You Pay the Expense Ratio?
- Daily Expense Ration Deduction Example:
- SEBI Limits on Expense Ratio
- Direct vs. Regular Plans: The Expense Ratio Difference
- Expense Ratio: Active vs. Passive Funds
Expense ratio is the annual fee charged by a mutual fund to manage your money. It is expressed as a percentage of the total money invested in the fund. This fee is used to cover the fund’s operating costs such as fund manager salary, administrative expenses, marketing costs, and distribution charges.
How is the Expense Ratio Calculated?
The expense ratio is expressed as a percentage of the fund’s total Assets Under Management (AUM).
The Formula:
Expense Ratio = (Total Operating Expenses / Total AUM) × 100
Example:
Suppose a mutual fund manages ₹1,000 Crore (AUM). The total cost of running the fund (salaries, marketing, admin) is ₹15 Crore per year.
- Expense Ratio = (15 / 1,000) × 100 = 1.5%
How Do You Pay the Expense Ratio?
You do not pay the expense ratio separately. It is automatically deducted from the fund’s Net Asset Value (NAV) on a daily basis.
This means the NAV you see is already adjusted for expenses. The deduction happens daily, regardless of whether the fund earns a profit or incurs a loss.
Daily Expense Ration Deduction Example:
If you have invested ₹1,00,000 in a fund with a 1% expense ratio, here is how the daily deduction looks:
| Date | Investment Value | Daily Expense Calculation (1% ÷ 365 days) | Daily Deduction |
| 1st Jan | ₹1,00,000 | (1% ÷ 365) × ₹1,00,000 | ₹2.74 |
| 2nd Jan | ₹1,00,500 | (1% ÷ 365) × ₹1,00,500 | ₹2.75 |
Over a year, these small daily deductions add up to approximately ₹1,000 on a ₹1 Lakh investment.
SEBI Limits on Expense Ratio
To protect investors, the regulator (SEBI) has set strict limits on how much a fund house can charge. As a fund grows larger (higher AUM), it must reduce its expense ratio.
| Assets Under Management (AUM) | Max Expense Ratio (Equity) | Max Expense Ratio (Debt) |
| On the first ₹500 Crore | 2.25% | 2.00% |
| On the next ₹250 Crore | 2.00% | 1.75% |
| On the next ₹1,250 Crore | 1.75% | 1.50% |
| On the next ₹3,000 Crore | 1.60% | 1.35% |
| Next ₹5,000 crore | 1.50% | 1.25% |
| On the next Rs. 40,000 crores | Total expense ratio reduction of 0.05% for every increase of Rs.5,000 crores of daily net assets or part thereof. | Total expense ratio reduction of 0.05% for every increase of Rs.5,000 crores of daily net assets or part thereof. |
| Above ₹50,000 Crore | ~1.05% | ~0.80% |
Mutual funds can charge up to 0.30% more if a sufficient portion of new investments comes from smaller cities (beyond the top 30 cities). This rule is meant to encourage more investors from tier-2 and tier-3 cities to invest in mutual funds.
Direct vs. Regular Plans: The Expense Ratio Difference
This is where you can save the most money.
- Regular Plans: Include a commission paid to a broker or distributor. This makes the expense ratio higher (usually by 0.5% to 1.0%).
- Direct Plans: Have no distributor commission. You invest directly with the AMC. This results in a lower expense ratio.
Why it matters: A 1% difference in expense ratio might seem small today, but over 20 years, it can result in a difference of lakhs of rupees in your final corpus due to the power of compounding.
Expense Ratio: Active vs. Passive Funds
- Active Funds: The fund manager actively researches and picks stocks to beat the market. These have higher expense ratios (often 1% to 2.25%).
- Passive/Index Funds: These simply copy a market index like the Nifty 50. Since there is no active stock picking, they have very low expense ratios (often 0.1% to 0.5%).