Is the expense ratio charged even if the fund loses money?

Yes. It is a cost of operating the scheme, accrued daily on assets regardless of performance. A scheme that falls in value still charges its expense ratio.

Do I pay the expense ratio separately?

No. It is deducted before NAV is declared, so it never appears as a debit. The practical effect is that your NAV — and therefore your returns — are lower than they would be without it.

Why does the Direct Plan have a lower expense ratio?

Because a Direct Plan's expenses exclude distributor commission. Both plans hold the same portfolio; the difference in cost is what produces their different NAVs over time.

Is a lower expense ratio always better?

Lower cost is always better all else being equal, but all else is rarely equal. Compare cost alongside mandate, portfolio and risk, and compare like with like — an index fund and an active fund are not competing on the same terms.

Choosing & Comparing Mutual Funds · Beginner · 5 min read

What Is the Expense Ratio of a Mutual Fund?

The short answer

The expense ratio, or Total Expense Ratio, is the annual percentage of a scheme's assets used to run it — fund management fees, administration, registrar and distribution costs. It is accrued daily and deducted before NAV is declared, so you never receive a bill and never see it as a line item: the returns you see are already net of it. SEBI caps the maximum TER a scheme may charge, and the cap varies by scheme type and size.

Written and reviewed by Amit Chadha, Mutual Fund Distributor at MutualFundAdvisor.in · AMFI ARN: 349461. Last reviewed 15 September 2026.

This article is investor education only. It is not investment advice, a scheme recommendation or an assurance of returns.

The expense ratio is the only cost of investing you pay every single year whether markets rise or fall, and the only one you never see leave your account.

Because it is invisible, it is easy to dismiss as a rounding error. Over a long holding period it is not.

What it covers

The Total Expense Ratio bundles the recurring costs of operating a scheme: the investment management fee paid to the AMC, registrar and transfer agent charges, custodian fees, audit and legal costs, marketing and distribution expenses, and, in a Regular Plan, distributor commission.

It is expressed as an annual percentage of the scheme's net assets. SEBI prescribes the maximum a scheme may charge, with the cap varying by scheme type and stepping down as the scheme's assets grow.

How it is actually charged

The expense ratio is accrued daily and deducted before the NAV for the day is struck. There is no separate debit, no invoice and no entry on your statement.

This has a useful consequence: every return figure you see for a scheme — on its factsheet, on a portal, in your own statement — is already net of the expense ratio. You do not need to subtract it again when comparing schemes. It also means the cost is charged on your whole balance every year, not just on what you invest.

Why a small percentage matters over time

A difference of half a percentage point sounds trivial against annual returns that move by tens of percent. The reason it matters is that it is charged every year, on a balance that is growing, and the money removed stops compounding.

How to compare it properly

Compare the expense ratio of the exact plan and option you would buy. The Direct and Regular plans of the same scheme carry different ratios, so comparing a Direct Plan's TER against another scheme's Regular Plan tells you nothing useful.

Compare within a category, too. Index funds and ETFs generally carry lower expense ratios than actively managed schemes because they are cheaper to run; debt funds generally carry lower ratios than equity funds. A number that is low for an active equity fund may be high for an index fund.

Cheapest is not automatically most suitable

Expense ratio is a certainty and returns are not, which is a strong argument for taking cost seriously. It is not an argument for selecting purely on cost.

A scheme with a slightly higher ratio but a mandate that matches your goal is a better fit than a cheaper one that does not. Cost is one of several things to compare — alongside mandate, portfolio, risk and consistency — not a ranking on its own.

It can change

A scheme's TER is not fixed for life. It moves as the scheme's assets change, within the regulatory caps, and fund houses disclose the current ratio and changes to it.

If you have held a scheme for several years, the ratio you checked at the start may not be the one you are paying now.

Key takeaways

The TER is the annual percentage cost of running a scheme, charged inside NAV.
You never see it billed — every published return is already net of it.
SEBI caps the maximum TER, and the cap varies by scheme type and size.
It is charged on your whole balance every year, so it compounds against you.
Compare the exact plan and option, and compare within a category.
A scheme's TER changes over time and is disclosed by the fund house.

Put this to work on your own numbers

Real Return Calculator
See what a percentage difference does to what you actually keep.
Lumpsum Calculator
Run the same amount at two rates to size a cost difference yourself.

For illustration only. Not investment advice. Mutual fund investments are subject to market risks; read all scheme related documents carefully. Returns assumed are hypothetical and not guaranteed.

Frequently asked questions

Sources and editorial review

Checked against the primary sources below on 15 September 2026. Scheme terms, tax rules and regulatory requirements change — confirm the current position before acting on anything here.

SEBI Investor Website
SEBI's investor material on Total Expense Ratio, the applicable limits and their disclosure.
AMFI Investor Corner
AMFI's investor education material on mutual fund costs.
MutualFundAdvisor.in editorial policy

What to read next

Next in the Choosing & Comparing Mutual Funds track.

Choosing & Comparing Mutual FundsWhat Is Exit Load in a Mutual Fund?What an exit load is, why schemes charge one, how the holding period is counted for a SIP, and how it differs from a lock-in and from tax.Direct vs Regular PlansDirect vs Regular Mutual Funds: Understanding the DifferenceHow the two plans of the same scheme differ in distribution, expense ratio and NAV — and what you are actually choosing between.Mutual Fund BasicsWhat Is NAV in a Mutual Fund?What Net Asset Value means, how it is calculated and declared, why a low NAV does not make a fund cheap, and which NAV applies to your transaction.Passive InvestingWhat is an Index Fund?What an index fund is, how it tries to track a market index, how that differs from active management, and what tracking difference and tracking error actually measure.

Want to talk this through with a person?

Amit Chadha is a Mutual Fund Distributor (ARN: 349461). The first conversation is free and educational.