What is Expense Ratio in Mutual Funds - Meaning, & How to Calculate

The mutual fund expense ratio is the annual fee charged by an AMC (Asset Management Company) for managing and operating a mutual fund scheme. In simple words, it is the percentage of a fund's assets used to cover its operating and management costs.

Let’s understand what the expense ratio is in detail.

What Is Expense Ratio?

The expense ratio is the percentage of a mutual fund's assets used to cover the costs of managing and operating the scheme. AMC stands for Asset Management Company.

It includes expenses such as fund management fees, administrative costs, marketing and distribution expenses, and other permitted operating costs.

The expense ratio may vary depending on the type of mutual fund and its plan. For example, regular plans generally have a higher expense ratio than direct plans because they include distribution and commission costs.

The expense ratio is charged to the mutual fund scheme's assets on a daily basis. It is reflected in the NAV, so investors do not have to pay it separately. Over the long term, even a small difference in the expense ratio can affect the overall returns earned from your investment.

How Expense Ratio Is Calculated In Mutual Funds

Here’s how the expense ratio is calculated in mutual funds.

Expense Ratio = (Total Annual Expenses / Average Daily Net Assets) x 100)

In the above formula,

Total annual expenses signify the expenses charged to the scheme, such as distribution expenses, fund manager's fees, etc.

The average daily net assets represent the average value of the fund's assets after deducting its liabilities, calculated over a specific period.

Let us understand the calculation with an example:

Assume an equity mutual fund scheme has average daily net assets of ₹700 crore and incurs annual operating expenses of ₹14 crore.

Therefore, expense ratio = ₹14 Cr/ 700 Cr x 100 = 2%.

This means the scheme has an annual expense ratio of 2%.

Expense Ratio Limit by SEBI

To protect investors' interests, SEBI has set limits on the expenses that mutual fund schemes can charge. Under the SEBI Mutual Funds Regulations, 2026, which came into effect on 1 April 2026, the expense limits depend on the type of scheme and its AUM (assets under management). For open-ended equity schemes, excluding index funds, ETFs and funds of funds, which have separate limits, the maximum base expense ratio starts at 2.10% on the first ₹500 crore of daily net assets, while for other open-ended schemes, it starts at 1.85%.

The total expense ratio includes the base expense ratio, permitted brokerage costs, transaction costs and statutory levies, including GST. Investors should check the latest expense ratio disclosures of the mutual fund scheme to understand the charges applicable to their investments.

FAQs

What is the expense ratio in mutual funds?

The expense ratio is the annual cost charged by an AMC for managing and operating a mutual fund scheme. It is calculated as a percentage of the fund's assets.

How is the mutual fund expense ratio calculated?

It is calculated by dividing the fund's total annual expenses by its average daily net assets and multiplying the result by 100.

How does the expense ratio affect mutual fund returns?

A higher expense ratio reduces the returns earned by investors because more money is spent on managing the fund.

Why is the expense ratio lower in direct mutual funds?

Direct mutual funds generally have lower expense ratios because they do not include distributor commissions.

Who decides the expense ratio limit for mutual funds in India?

SEBI sets the limits on the expenses that mutual fund schemes can charge to protect investors' interests.