8.45How to evaluate expense ratios
1What is it?
Compare the TER of the direct plan against peers in the same category.
2Why does it exist?
Costs are one of the few things you can control. For index funds, the lowest cost with low tracking error usually wins.
3Practical use
Rough guide (direct plans): index funds/ETFs ≈ 0.05–0.3%; active large-cap ≈ 0.5–1%; active small/mid ≈ 0.5–1.2%. Higher is fine only if consistently justified by returns.
4Quick revision
- Compare direct TER within category.
- Lowest cost matters most for passive funds.
5Knowledge check
Q1. For two Nifty 50 index funds, which matters most?Show answer
Lower expense ratio and tracking error.
Q2. Can a higher TER be justified?Show answer
Only by consistently better after-fee returns.
Q3. Where to find TER?Show answer
AMC website, factsheet, or AMFI.