Expense ratio: the silent drag on your returns

The expense ratio is the percentage of your money a fund charges every year to manage it — covering the fund manager, administration, registrar and distribution. A 1.5% expense ratio means ₹1,500 a year on every ₹1,00,000 invested, deducted automatically from the NAV. You never get a bill, which is exactly why most investors never notice how much they're paying.

How the fee is actually charged

The fund deducts roughly 1/365th of the annual ratio from the NAV every single day. The return you see on any fund page is always after this deduction — so a fund that earned 13.5% gross and charges 1.5% shows up as a 12% return. The fee is charged in good years and bad alike; it is the one component of your return that is guaranteed, and it's guaranteed to be negative.

Why a "small" number matters

1% may sound trivial, but it compounds against you. On a ₹10,000 monthly SIP over 25 years at 12%, the difference between a 0.5% and a 1.5% expense ratio is roughly ₹25–30 lakh of final corpus — money that went to fees and the growth those fees would have earned. The longer your horizon, the crueller the arithmetic.

Direct vs Regular

Direct plans skip the distributor commission, so their expense ratio is lower (often by 0.5–1%). Same fund, same manager, same portfolio — just cheaper. Over time, Direct quietly outperforms Regular by exactly that fee, every year, with zero extra risk. The full story is in Direct vs Regular plans.

What's a "good" expense ratio?

• Index funds / ETFs: 0.05%–0.30% — the cheapest way to own equities.
• Large-cap active: ~0.5%–1.2% for direct plans.
• Mid/small-cap active: ~0.7%–1.8% — research in these segments costs more.
• Debt funds: should be low — every 0.1% matters when gross yields are only 7–8%.

SEBI caps expense ratios on a sliding scale by AUM, so very large funds tend to be a little cheaper per rupee managed.

How to use this on Dhanik

Cost matters most when everything else is equal — between two similar funds in the same category, the cheaper one starts every year with a head start. Sort any category by expense ratio in the screener, and check the cost gap when you compare funds side by side. Cost is 20% of the Dhanik Score for exactly this reason.

→ Sort funds by lowest expense ratio in the MF Screener.