People look at two things when buying a mutual fund: its historical returns and the manager’s reputation. Few people pay attention to the expense ratio, and that inattention is costing them much more than they think.
The expense ratio or Total Expense Ratio (TER) is the annual fee taken by a fund house from your invested amount to pay for various management, administration and operational charges. While this doesn’t sound too alarming, stated as a seemingly insignificant percentage, it makes a huge impact as it works just like your returns – annually and compounded against you.
Understanding with an example
Suppose there are two funds whose annual gross returns are the same, at 12%. However, their TERs are different – 2% for the first one, and 1% for the other. This means that the net return of the first one will be 10%, while that of the second fund will be 11%. Let us take an example where we are starting off with a lump sum of ₹10 lakh. Using an expense ratio calculator, here is how 1% makes a huge difference over time.
| Year | Fund A (2% TER, 10% net) | Fund B (1% TER, 11% net) |
| 5 | ₹16.1 lakh | ₹16.9 lakh |
| 10 | ₹25.9 lakh | ₹28.4 lakh |
| 15 | ₹41.8 lakh | ₹47.8 lakh |
| 20 | ₹67.3 lakh | ₹80.6 lakh |
Until the first decade, this 1% difference does not seem to make much of an impact. But by the 10th year, the difference is ₹2.5 lakh, which can still be ignored easily. By the 20th year, the difference is ₹13.3 lakh, which amounts to about 20% extra corpus accumulated by Fund B, all due to the difference in a single percentage point!
Why the fee remained undetected for so many years
Until now, Indian mutual funds included in their TER all sorts of sales and marketing costs, administrative expenses, transaction costs, management fees, registrar fees, custodian fees and audit fees, making it a single number that was calculated against the average net asset value of the fund.
That made it impossible to understand how the fund allocated money inside the TER. For example, a fund could have paid much more in distribution costs than management costs, and there was no easy way to determine that.
However, under the SEBI (Mutual Funds) Regulations, 2026, adopted on 17 December 2025, TER will be unbundled into the Base Expense Ratio that will consist only of management fees alongside the statutory charges, including GST, STT and stamp duty, that will be separately applied based on actual cost. Also, brokerage will be restricted as the cap for cash market has been lowered from 12 basis points to 6, while the derivatives cap has been reduced from 5 to 2.
From the investor’s perspective, it seems to be a good move that brings nothing but benefits. However, nuance offers a reality check. Under the new system, some slabs were raised, giving smaller and newer schemes a higher allowance, due to which distributors stand to benefit with high trail commission.
So now they are practically incentivised to persuade clients to switch to new funds, because it earns them a higher commission without offering any genuine proof of why the new fund is better.
What does it mean for you
Do not expect your fund to get cheaper simply because the regulations have changed. Most of the reported reduction in TER of 10 to 15 basis points (depending on AUM slab) is due to statutory charges being separated from the base ratio rather than being eliminated altogether.
Instead, check your fund’s factsheet or go to the AMC’s website, see the TER of its direct plan and compare it to a similar fund of another scheme in the same category.
Direct plans always provide a lower fee than regular plans because the distributor’s commission is not charged here and it sometimes matters even more than the actual fund’s performance. Use a systematic investment plan calculator to check the final corpus at the end of your investment period.
Conclusion
A fee that looks low in the factsheet isn’t low when it has thirty years to compound. No one pays attention to the 2% yearly fee. Everyone will pay attention to what it turns into upon retirement. With an Expense Ratio Calculator, you can strip away the invisibility of fund management fees and potentially save lakhs in the process.
