8.8What is an expense ratio?
1What is it?
The expense ratio (Total Expense Ratio, TER) is the yearly fee charged by the fund, as a % of your investment, deducted daily from the NAV.
2Why does it exist?
It pays for management, operations and distribution. It is the main cost of a fund and reduces your return every year.
3Diagram
TER 0.5%
₹8,82,000
TER 1.5%
₹7,37,000
4Calculation
Final value = P × (1 + return − TER) ^ years
- ₹1,00,000 for 20 years; gross return 12%.
- TER 0.5% → 11.5% net → ≈ ₹8,82,000.
- TER 1.5% → 10.5% net → ≈ ₹7,37,000.
A 1% fee difference costs about ₹1.45 lakh over 20 years. (Hypothetical.)
5Quick revision
- Yearly fee, % of assets.
- Deducted from NAV daily.
- Small differences compound into big money.
6Knowledge check
Q1. Is the expense ratio charged separately?Show answer
No, it’s deducted from the NAV.
Q2. Why does a 1% difference matter so much?Show answer
It compounds every year.
Q3. Which plan type has a lower TER: direct or regular?Show answer
Direct.