Expense Ratio — Mutual Fund Term Explained

The annual fee charged by a mutual fund as a % of AUM. Covers management fees, operational costs and commissions. Deducted daily from NAV.

The expense ratio is the total annual cost of running a mutual fund, expressed as a percentage of average daily AUM. It covers fund manager fees, administration, registrar fees and distributor commissions.

Deducted from NAV daily (1/365th of the annual ratio). You never receive a bill — it silently reduces your NAV. A 1% expense ratio on ₹10 lakh means ₹10,000/year goes to the fund house.

SEBI caps expense ratios by AUM tier. Direct plans have no distributor commission, so they are typically 0.5-1% cheaper.

Formula

Expense Ratio = (Total Annual Fund Expenses ÷ Average AUM) × 100

Example

Fund with ₹1,000 crore AUM and ₹12 crore annual expenses → expense ratio 1.2%.

Related terms

• NAV (Net Asset Value) — The price of one unit of a mutual fund, calculated daily from portfolio value minus liabilities divided by units outstanding.
• Direct Plan — Mutual fund units purchased directly from the AMC without a distributor. No commission paid, so expense ratio is 0.5-1% lower than regular plans.
• Regular Plan — Mutual fund units purchased through a distributor who earns a commission. Higher expense ratio than direct plans.
• AUM (Assets Under Management) — The total market value of all assets managed by a mutual fund scheme or AMC. A key indicator of fund scale.

Browse the full mutual fund glossary, or see this concept in action in the fund screener.