What is expense ratio in mutual fund? It can cost you lakhs

Summary: Expense ratio may look like a small fee, but over time, it can drain a surprising chunk of your mutual fund returns. Here’s why investors often overlook it, and why you shouldn’t.

Aniket, 32, had been diligently investing in a flexi-cap fund for the last 10 years. With the fund clocking around 12 per cent annual returns, his portfolio had swelled nicely.

One fine afternoon, he checked his portfolio and felt proud of the wealth he had built over time. Excited, he showed it to his friend Aman, expecting admiration.

Instead, he got a rude shock.

“I am impressed by your consistency,” Aman said, scrolling through the numbers. “But you’ve lost nearly Rs 1.7 lakh.”

Aniket was taken aback. “What? How is that possible? The fund’s given me good returns!”

The missing piece

Aman explained that Aniket had chosen the fund’s regular plan, which carries a higher expense ratio.

“What is an expense ratio?” Aniket asked, looking puzzled.

Every mutual fund charges a fee for managing money. This fee, expressed as a percentage of the fund’s assets, is called the ‘expense ratio’. It covers the manager’s salary, administrative costs and distributor commissions, among other costs borne by the fund house.

What’s more, investors don’t pay it separately; it’s deducted silently from your fund’s returns every single day.

The numbers don’t lie

To make his point, Aman pulled out an example using Aniket’s own investments:

• Since he invested Rs 10,000 every month for 10 years in a flexi-cap fund, earning 12 per cent annually, here’s how much his investment would be valued today:
  • In the regular plan (with a 2 per cent expense ratio), his corpus would have grown to about Rs 20.15 lakh.
  • In the direct plan (with a 0.5 per cent expense ratio), the same corpus would be worth about Rs 21.82 lakh.
  • That’s a gap of nearly Rs 1.7 lakh, lost solely due to higher costs.

“And that’s just over 10 years,” Aman said. “Stretch it to 20 or 30 years, and the leak becomes massive, running into tens of lakhs.”

Suggested read: Direct vs regular mutual funds: Which one should you choose?

Why a fund’s expense ratio matters more than you think

At first glance, an expense ratio of 2 per cent may seem inconsequential. After all, if a fund is giving you 12 per cent returns, why worry about a small cut? However, that’s where many investors, like Aniket, underestimate the impact of the expense ratio, when in reality, it is among the most crucial metrics to check before investing in a mutual fund.

Here’s why.

#1 Higher expenses derail wealth building

Think of compounding as a snowball rolling down a hill. Every rupee reinvested builds on itself year after year. However, even if a slice of that return is shaved off daily as expenses, your snowball grows at a much slower pace.

#2 The bigger your wealth, the bigger the cost

On small amounts, a fund’s expense ratio may not feel significant. But once you’ve invested several lakhs or crores, even a half per cent difference translates into huge sums over time.

Put simply, the expense ratio is like a slow leak in your investment bucket. You may not notice it today, but over 15-20 years, it can leave a dent in your corpus.

Lesson learnt

Aniket shook his head, finally understanding. “I thought looking at long-term returns was enough. But I never imagined a small cost could eat away so much.”

“Exactly,” Aman replied. “Other things like past returns, ratings, fund managers and so on are important, but so are costs. Always check the expense ratio. Sometimes, a fund with slightly lesser returns but lower expenses can leave you with a much larger corpus. And don’t forget to choose direct over regular plans, especially if you are a DIY (do it yourself) investor.”

Want to invest Rs 10,000 in the right mutual funds?

Value Research Fund Advisor can help. Here, you will get a list of funds handpicked by our analysts as well as funds that are tailored to your financial goals.

With Value Research Fund Advisor, you can cut through the clutter, helping you find the right funds at the right cost, so that you don’t leave lakhs on the table.

Explore Fund Advisor today

Also read: How do mutual funds charge expense ratio?

This article was originally published on August 18, 2025.