Expense Ratio — The Charge That Never Shows Up

The expense ratio, sometimes written as TER, is the annual cost of running the scheme expressed as a percentage of assets. It covers fund management, administration, registrar and custodian costs, and in a regular plan the commission paid to the distributor.

It is accrued and deducted from the scheme itself, which is why the NAV you see is already after it. You never receive a bill and no amount is debited from your bank. The cost is entirely real and entirely invisible, and that combination is why it goes unexamined for years.

Regulations set limits on how high it can be, and those limits vary by scheme type and size. The scheme document and the fund house\'s disclosures give the current figure for your scheme, and it changes as the scheme\'s size changes.

Two reasons, and the second is the one worth sitting with.

It is certain. Nobody can tell you what a scheme will return. Everybody can tell you what it costs. In a world of unknowns, a known number deserves attention out of proportion to how boring it is.

It applies every year, on the whole holding. Not on your gains, not on your instalment, but on the value invested, for as long as you hold it. A cost that recurs on a growing base behaves differently from a one-off charge, which is why a small difference in ratio is not a small thing over a long holding period.

We are not going to put a figure on what that difference amounts to, because doing so requires assuming a return, and assumed returns printed as facts are exactly what we avoid on this site. The structural point stands without any assumption.

This page describes the mechanism that pays us, so it would be dishonest not to say so plainly.

A regular plan\'s expense ratio includes a commission the fund house pays to the distributor who brought and services the investment. That is us. A direct plan has no distributor and therefore no such component, so its ratio is lower and its NAV moves differently over time even though the underlying portfolio is identical.

If you can select a scheme, review it periodically and stay invested through a fall without help, a direct plan is cheaper and it is what you should use. We have set that out at length, including who should skip us entirely, on direct versus regular plans.

What a distributor is for is narrower than most pitches suggest: somebody who answers when markets fall, a review that actually happens, and the folio housekeeping most people postpone indefinitely. Whether that is worth the cost is genuinely your call.

Three rules, and the first prevents most of the mistakes.

• Compare within a category. Categories differ structurally in what they cost to run, so comparing across them tells you about the category rather than the scheme.
• Compare plan to plan. A regular plan against a direct plan is not a like-for-like comparison; it is the same scheme with and without a distributor.
• Check it periodically. It is not fixed for life and changes as the scheme grows or shrinks.

One practical note on where to find it. The current figure is published by the fund house and appears in the scheme documents, and it is stated separately for the direct and regular plans of the same scheme. Seeing both side by side is the clearest way to understand what the distributor component actually is.

And do not let it become the only criterion. The cheapest scheme in a category that does not suit your horizon is still the wrong scheme, and cost is one input rather than the answer.

Three charges get confused with it, and separating them makes everything clearer.

Exit load is charged by the scheme only when you redeem early, on the redemption value, and it goes back into the fund. Our guide on exit load explains how it is counted per purchase.

Stamp duty is a small statutory deduction on purchases, which is why units allotted can look slightly lower than a clean division of your instalment by the NAV.

Tax is levied by the government on the gain when you redeem, and has nothing to do with the scheme\'s running cost. The structure is on our page about mutual fund taxation.

A last word on how this gets discussed. Cost is the part of investing that can be known in advance, which is exactly why it deserves more attention than it usually gets and why it tends to receive less. Nobody sells a scheme on its expense ratio; it is a number you have to go and look at yourself.

If you would like somebody to tell you what you are currently paying across your holdings, including on folios never invested through us, that is a short exercise and there is no charge for it. Get in touch. And before considering a new scheme, our page on new fund offers is worth reading.