How much are your mutual fund fees costing you?

Read the article to understand the concept of Total Expense Ratio (TER) and how it quietly impacts long-term returns.

Published on 13 November 2025

3 min read

Every time you invest in a mutual fund, a fee is deducted from your investment by the fund house or asset management company (AMC). This fee is called the total expense ratio (TER) and it encompasses management and administrative costs, marketing expenses and other operational charges. The fee is typically charged as a percentage of your investments in the mutual fund.

While it may seem like a small percentage fee, this fee can add up over time, affecting your overall wealth creation. Since it's deducted from the fund's total returns instead of being charged separately, you may not notice that part of your investment gains is taken by the AMC rather than reinvested for more growth.

Types of mutual fund plans and their TERs

There are two types of mutual fund plans in India regular and direct. Regular plans have higher TERs due to commissions paid to the distributors who sell them, while direct plans have lower TERs since they are purchased directly from the fund house or AMC.

Understanding TER is essential as it directly impacts your net returns. Even a seemingly tiny difference of 1% in TER between a regular and a direct plan can compound significantly over long periods, impacting the returns of the funds.

Case in point

Assume you invest ₹50,000 in a direct plan with a TER of 0.5% and another ₹50,000 in the same fund but through a regular plan with a TER of 1.5%. If both generate a gross annual return of 12% over 10 years:

Invested SIP of ₹ 50,000 @12% p.a. for 10 years

	Regular	Direct
Invested	₹ 50,000	₹ 50,000
Gross return (A)	12.0%	12.0%
Expense ratio (B)	1.5%	0.5%
Net return (A-B)	10.5%	11.5%
Total investment after 10 years	₹ 1,05,40,741	₹ 1,11,70,161
Difference (D-C)	₹ 6,29,420

The regular plan with 1.5% TER yields approximately ₹1,05,40,741
The direct plan with 0.5% TER yields approximately ₹1,11,70,161

That’s a ~ ₹ 6,30,000 difference!

How to evaluate mutual funds

1. Compare TERs alongside other metrics

While return potential is important, always check a fund’s TER before investing. Compare it with peers in the same category. All else being equal, choose the fund with the lower TER.

2. Seek personalised investment advice

Understanding TER and its impact can feel overwhelming, especially for new investors. If you are unsure, consider seeking advice from a SEBI-Registered Investment Adviser (RIA). They can tell you exactly what you are paying for a pre-agreed fee which may be lower than that paid for a regular plan. They can also offer personalised and unbiased advice.

3. Choose direct plans for cost efficiency and control

If you are comfortable managing your own investments or using online platforms, go for direct plans. The reduced TER significantly boosts your long-term returns by cutting out distributor commissions. Additionally, combining direct plan investing with personalised investment advice ensures your portfolio is customised to your goals, risk profile and investment timeline—helping you make informed, confident decisions that align with your unique financial journey.

4. Understand how TER varies across categories

Actively managed funds typically have higher TERs than passively managed ones (such as index funds or ETFs) because of the research and analysis costs involved.

5. Watch out for TER hikes

TERs can change. SEBI mandates that mutual funds must disclose updated TERs regularly. Make a habit of monitoring your fund’s TER every few months to ensure your investments remain cost-effective. Also make sure you read scheme documents and monitor changes, especially in newer funds.

Bottom line: Understand costs that eat into returns

Understanding TERs is a powerful step towards smarter investing that will help you make confident decisions that best serve your future. This might mean choosing direct mutual fund plans to significantly reduce costs and boost long-term returns. Seeking personalised investment advice from a SEBI RIA can also ensure that your portfolio aligns with your unique goals, risk appetite and investment horizon.

Disclaimer: This article is for educational purposes only.