Definition
Expense Ratio
The expense ratio is the annual fee a mutual fund or ETF charges as a percentage of assets, covering management and operating costs, which directly reduces investor returns.
The expense ratio (TER) is the yearly cost of running a fund, expressed as a percentage of the assets it manages. It is deducted from the fund's returns, so a higher ratio quietly erodes what you earn over time.
SEBI caps expense ratios and they vary by fund type — passive index funds and ETFs are typically far cheaper than actively managed funds. Direct plans (bought without a distributor) have lower ratios than regular plans.
Over long horizons, even small differences in expense ratio compound significantly, which is a core argument for low-cost passive and direct investing.
Related terms
- SmallcaseA smallcase is a ready-made basket of stocks or ETFs built around a theme or strategy that investors can buy in one click through their broker, holding the securities directly.
- Robo-AdvisoryRobo-advisory is automated, algorithm-driven investment advice and portfolio management delivered online, typically recommending and managing low-cost diversified portfolios based on your profile.
- Index FundAn index fund is a passively managed mutual fund that aims to replicate the performance of a market index by holding the same securities in the same proportions, at low cost.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.