Many investors compare two mutual funds in the same category and ask a simple question: Why are the returns different even when the portfolios look similar? A big reason is cost. The expense ratio in mutual funds is an annual charge that covers running and managing the scheme, and it is adjusted into the NAV every day. That means you do not see a separate fee debit, but your returns are lower than they would be without that cost.

In this guide, you will learn the meaning of expense ratio, how it affects NAV and returns, how to check TER in India, and how to use it when choosing between direct and regular plans.

What is the expense ratio in mutual funds, and why does it matter

The expense ratio, also called Total Expense Ratio or TER, is the yearly operating cost a mutual fund scheme charges as a percentage of its assets. AMFI explains that TER is calculated as a percentage of the scheme’s average NAV and that the daily NAV is disclosed after deducting expenses.

Expense ratio exists because running a mutual fund has real costs, such as investment management fees, administration, registrar and custodian fees, audit fees, transaction-related costs, and sales and marketing expenses.

Why does it matter?

TER reduces your net return because expenses are adjusted into NAV over time.
2. A small TER difference can create a difference in final value when you invest for many years.
3. In lower return categories, costs can take a larger share of what you earn.

How is the expense ratio deducted from the NAV in mutual funds

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TER is shown as a yearly percentage, but its impact shows up in NAV every day.

Step 1: The scheme incurs expenses
A mutual fund scheme has ongoing costs such as fund management, administration, customer servicing, audit, registrar and custodian services, and other allowed expenses.

Step 2: The fund calculates TER on the average NAV
TER is calculated as a percentage of the scheme’s average NAV.

Step 3: Expenses are adjusted into the NAV
The NAV you see is disclosed after deducting expenses. You do not pay TER as a separate debit.

Step 4: TER differs by category and plan type
Active funds usually cost more to run than passive funds. Direct plans usually have a lower expense ratio than regular plans because distributor costs are not included in direct plans.

Step 5: Extra TER can apply in specific cases
Mutual funds may charge up to 30 basis points extra if inflows from beyond the top 30 cities meet the conditions mentioned by AMFI.

Step 6: TER is disclosed for investors to check
Mutual funds disclose TER on their websites and on AMFI’s website.

Why does the expense ratio change over time

Many investors expect TER to stay the same, but it can move up or down.

AUM changes
SEBI allows different TER ceilings by AUM slabs. When a scheme’s assets move across slabs, the allowed maximum TER changes.
Plan level changes
Direct and regular plans have different expense ratios because regular plans include distribution costs.
AMC revisions within limits
An AMC can revise expenses within the permitted limits, and the updated TER must be disclosed.

Practical tip
Always check the latest TER before comparing funds, because older TER numbers may no longer be current.

Example: Direct plan vs Regular plan cost impact using a real scheme

This is an illustration to show how costs can change outcomes over time. SEBI’s calculators also state that results are illustrative and not actual returns.

Real plan pair used for TER
HDFC Balanced Advantage Fund shows a TER of 0.69 percent for the direct plan and 1.28 percent for the regular plan on its scheme pages. These values can change, so treat them as “as seen on 9 April 2026”.

Scenario
You invest for a long-term goal and choose the same scheme in two ways.
Option 1: You invest in the direct plan on the AMC website.
Option 2: You invest in the regular plan through a distributor.

Assumptions for illustration
1. Investment amount is ₹1,00,000
2. Time period is 10 years
3. Portfolio return before expenses is assumed to be 10 percent a year
4. Direct plan TER is 0.69 percent, so the net return used is 9.31 percent
5. Regular plan TER is 1.28 percent, so the net return used is 8.72 percent

Formula:
SEBI investor education material uses the compounding formula
A equals P times (1 plus r) to the power n

Calculation results:
1 ₹1,00,000 at 9.31 percent for 10 years becomes about ₹2,43,556
2 ₹1,00,000 at 8.72 percent for 10 years becomes about ₹2,30,725
3 The difference is about ₹12,831

If you extend the same illustration to 20 years
1. Direct plan result becomes about ₹5,93,196
2. Regular plan result becomes about ₹5,32,340
3. Difference becomes about ₹60,856

Key takeaway
When the underlying portfolio return is assumed to be the same, the plan with lower expense ratio can end up with a higher final value over long holding periods.

Key features of the expense ratio in mutual funds

It is expressed as a percentage
TER is a percentage of scheme assets and is calculated as a percentage of average NAV.

It is adjusted into NAV.
AMFI says that daily NAV is disclosed after deducting expenses, which is why you do not pay separately.

It changes across plan types.
AMFI states direct plan has a lower expense ratio than the regular plan due to savings of distributor commissions and distribution costs.

It can change over time.
TER can change due to AUM slab movement, AMC fee changes within limits, and other allowed expense changes, with required disclosures.

There is a regulatory ceiling.
SEBI materials describe slab-based maximum TER limits for open-ended schemes other than certain categories like index funds and ETFs.

SEBI rules: what investors should know

SEBI published the SEBI (Mutual Funds) Regulations, 2026 on January 16, 2026.
SEBI circular text in 2026 also refers to the regulations coming into force from April 1, 2026.

Here is what you should remember.

1. There are limits on what a fund can charge as TER.
2. TER needs to be disclosed so investors can compare and decide.

Maximum TER limits in India, Quick Snapshot

SEBI’s FAQ for mutual fund intermediaries lists slab-based maximum TER ceilings for many open-ended scheme types, with separate ceilings for equity-oriented and other than equity-oriented schemes.

AUM slab in ₹ crore	Maximum TER for equity-oriented schemes	Maximum TER for other than equity-oriented schemes
First 500	2.25%	2.00%
Next 250	2.00%	1.75%
Next 1,250	1.75%	1.50%
Next 3,000	1.60%	1.35%
Next 5,000	1.50%	1.25%
Next 40,000	TER reduction of 0.05% for every increase of 5,000	TER reduction of 0.05% for every increase of 5,000
Balance above 50,000	1.05%	0.80%

What the “reduce by 0.05 percent” line means

If AUM increases within that band, the maximum allowed TER comes down in steps, which encourages lower costs for larger schemes.

How to check the expense ratio of a mutual fund in India

If you want the latest TER, use these official sources.

Method 1: Check AMFI TER disclosure
Go to AMFI’s TER of MF schemes page, select the financial year and month, then choose the fund house and scheme name to view or download the TER.

Method 2: Check the AMC scheme page
Many AMCs show TER on the scheme page for each plan. This is useful when you want to compare the direct plan and regular plan TER for the same scheme.

Method 3: Check the scheme factsheet
The factsheet usually lists the expense ratio under the scheme details. Use it to compare within the same category and same plan type.

Quick check before you compare:

1. Compare the direct plan with the direct plan
2. Compare the regular plan with the regular plan

Mixing plan types leads to wrong conclusions.

Advantages of understanding the expense ratio

Better fund comparisons
When two funds are similar in category and risk, a lower TER can leave more return for the investor.
Helps with long-term planning
Since costs repeat every year, TER is important when you plan for goals that are many years away.
Helps you choose between direct and regular plans
AMFI explains direct plan has a lower expense ratio due to no distributor, and this difference can compound over time.
Especially useful for passive funds
Index funds aim to track an index, so costs matter a lot. TER is one of the key reasons two index funds tracking the same index can show slightly different results.

Risks or limitations of using the expense ratio as a decision factor

Lowest TER does not always mean the best fund
A fund can be cheap but still be a poor fit for your goal or risk level.
TER is not the only cost you face
Exit load, taxes, and transaction-related charges can affect what you finally receive. TER is only one part of the cost picture.
TER can change
TER can change due to AUM changes, allowed expense changes, and revisions within regulatory limits.
Comparing across categories can mislead you
Compare equity funds with equity funds, and debt funds with debt funds. Costs and return expectations differ across categories.

Comparison: Direct plan vs Regular plan expense ratio

AMFI clarifies direct plan has a lower expense ratio than the regular plan because there is no distributor or agent involved, and distribution commissions are saved, which supports a slightly higher NAV over time.

Feature	Direct plan	Regular plan
How you invest	Directly without a distributor	Through a distributor or agent
Expense ratio	Lower in most cases	Higher in most cases
NAV over time	Tends to be higher for the same scheme	Tends to be lower for the same scheme
Best for	Investors are comfortable choosing funds on their own	Investors who want distributor support

Note:
If you are confident about fund selection and review, direct plans can reduce ongoing costs. If you use a distributor, understand what you are paying for and ensure you are getting value in return.

Common mistakes beginners make with the expense ratio

Comparing the direct plan TER with the regular plan TER
This is the most common mistake and leads to wrong conclusions.
Choosing only based on TER
Use TER as a filter, not as the full decision. Also, check category fit, risk level, portfolio style, and track record.
Not checking the TER from official disclosures
Many investors never look at the AMFI TER disclosure or the AMC TER disclosure section.
Thinking TER is a separate fee
AMFI clearly states that NAV is disclosed after deducting expenses.
Ignoring that TER can change
Review TER occasionally, especially if you invest for many years.

Who should focus most on the expense ratio

Most useful for:

Long-term investors building wealth for goals like retirement or children’s education
2. Index fund investors and ETF investors, where cost differences can influence how closely returns match the index.
3. Investors choosing between the direct and regular plan of the same scheme

Less useful as the only decision factor for:
1. Investors picking active funds without checking risk and portfolio quality
2. Investors making a choice only because the TER is lower by a very small margin, while ignoring the overall fund fit

Conclusion

The expense ratio in mutual funds is the annual running cost of a scheme, shown as TER, and it is adjusted into the NAV you see every day. AMFI explain the daily NAV is disclosed after deducting expenses, which is why you do not pay it separately.

Over long periods, even small TER differences can change your final value. Use TER to shortlist funds, compare within the same category and the same plan type, and verify the latest TER using AMFI disclosures or the AMC website before you invest.