When you invest in a mutual fund, the fund house incurs costs such as management fees, administrative expenses, transaction costs, and others. These are collectively reflected in the Total Expense Ratio (TER).
The expense is deducted from the scheme’s assets and is reflected in its daily NAV. In other words, a higher expense ratio can reduce the returns that ultimately investors receive.
According to Value Research data posted on X, active funds have a much wider range of expense ratios across diversified, sectoral, and thematic categories, while passive funds tend to be clustered at lower costs.
An active fund relies on the fund manager to make stock selection and portfolio decisions with the aim of generating alpha. Passive funds, such as index funds, track an index and therefore typically have lower operating costs.
Meanwhile, direct plans are bought directly from the asset management company without a distributor, and therefore generally have lower expense ratios than regular plans.
The data shows wide spreads across several active and passive categories, highlighting that investors should not assume similar funds have similar costs.
Active equity fund category cost gaps
Among active diversified equity categories, large-cap funds have the widest expense-ratio spread in regular plans. The ratio ranges from 0.48% to 2.1%, a difference of 1.62 percentage points.
At the other end, large & mid-cap funds have the narrowest spread, ranging from 1.26% to 2.10%, or 0.84 percentage points.
The gap is even wider in direct plans.
Flexi-cap and large-cap funds have the highest spread at 1.74 percentage points each. Flexi-cap funds range from 0.3% to 2.04%, while large-cap funds range from 0.14% to 1.88%.
Small-cap funds have the narrowest direct-plan spread, from 0.33% to 0.81%, a difference of 0.48 percentage points.
Passive equity funds: Costs are generally lower
The expense-ratio spread is considerably narrower for passive funds. Flexi-cap is the only category where the maximum regular-plan expense ratio exceeds 0.9%, reaching 1.27%.
Among regular plans, flexi-cap has the widest spread at 1.09 percentage points, while ELSS funds have the narrowest at 0.38 percentage points, ranging from 0.52% to 0.9%.
In direct plans, large-cap has the widest spread, from 0.04% to 0.68%, or 0.64 percentage points. Multi-cap has the narrowest, at just 0.05 percentage points, with expenses ranging from 0.3% to 0.35%.
Active sectoral and thematic funds can cost more
The cost difference becomes more pronounced in active sectoral and thematic funds, with several categories reaching the SEBI ceiling of 2.10% in regular plans.
In regular plans, the Quant category has the widest spread at 1.28 percentage points, while Manufacturing and ESG have the narrowest, both at 0.51 percentage points.
In direct plans, factor-based funds show the widest spread at 1.21 percentage points. Auto & Transportation has the narrowest gap at 0.17 percentage points, with expense ratios ranging from 0.69% to 0.86%.
Passive sectoral funds: Cheaper, but choices are limited
Passive sectoral and thematic funds generally remain cheaper, with most regular plans capped at 0.90% or lower. However, passive choices are not available across every theme. Business Cycle, Innovation, and Quant have no passive fund offerings.
Among available regular plans, PSU funds have the widest spread at 0.84 percentage points, while ESG funds have the narrowest range, from 0.35% to 0.40%.
In direct plans, factor-based funds range from 0.02% to 0.51%, while infrastructure funds have the narrowest spread, at just 0.01 percentage point, from 0.38% to 0.39%.
Disclaimer: This is purely for educational/informational purposes and should not be taken as any sort of investment advice. Always consult a SEBI-registered advisor before making any investment decisions.