MF Expense Ratio Impact

How expense ratio compounds

Total Expense Ratio (TER) is charged daily on the NAV before it's declared, so a fund showing “15% return” is already net-of-expenses. The catch: the fee compounds against you. A 1% drag on a 12% gross fund leaves you with 11% net — the missing 1% would have compounded too. SEBI's 2018 TER cap structure limits equity funds to 1.05% TER on AUM > ₹50,000 cr, sliding up to 2.25% for <₹500 cr funds. Direct plans cut out the distributor commission (~0.5–1%), so the same scheme has two TERs.

Worked example

₹10,000/month SIP for 30 years, gross fund return 12%. Direct plan at 0.5% TER → net 11.5% → corpus ≈ ₹3.51 crore. Regular plan at 1.5% TER → net 10.5% → corpus ≈ ₹2.83 crore. That's ₹68 lakh gone to commission — on a contribution of just ₹36 lakh. The longer the horizon, the wider the gap: at 40 years it's ₹2 crore plus. Index funds at 0.1–0.2% TER widen the lead further over actively managed regular plans.

When to use this

• Reviewing legacy regular-plan SIPs (typical 1.8–2.2% TER) before switching to direct
• Comparing an actively managed fund at 1.5% vs an index fund at 0.2% over your goal horizon
• Negotiating with a distributor — show the rupee gap on your specific SIP size and horizon

For SIP corpus projection see the SIP Calculator; the full mechanics are in our expense ratio impact blog.