Imagine two mutual fund investors investing the same SIP amount for the same period of time, earning returns from the same fund, and taking the same level of market risk. Yet, one investor ended up with more wealth in his or her investment corpus compared to the other. Do you know why?
The difference isn’t due to timing or market performance, but due to a single factor: the expense ratio, which differs between direct and regular mutual funds.
While the expense ratio may seem like a small annual charge, it directly lowers your investment returns, and in the long term, a minor difference in expense ratio between regular and direct funds will make a huge difference in your returns in lakhs.
Here’s how the expense ratio can quietly influence your long-term SIP returns and why choosing between a regular and direct mutual fund plan can have a significant impact on your wealth creation.
What is an expense ratio and how does it work?
An expense ratio is a fee charged by an Asset Management Company (AMC) to manage the investment money, and it covers the expenses related to the costs of running the fund, such as fund management, research, administration, registrar fees, marketing, and other operating expenses.
The expense ratio is expressed as a percentage of the fund’s average Assets Under Management (AUM), and the fund doesn’t deduct expenses from your account as a separate charge. Instead, the fund deducts a small portion of the expenses every day from the fund’s assets before calculating the Net Asset Value (NAV).
The expense ratio of a scheme can change over time, subject to the maximum limits prescribed by SEBI. AMCs review and revise expense ratios based on various factors, and any change is reflected in the fund’s NAV.
Key drivers that can trigger a change in the expense ratio are changes in underlying scheme AUM as the fund’s AUM grows; many fixed operating costs are spread over a larger asset base, allowing the AMC to reduce the expense ratio.
Additionally, there are regulatory changes, such as when SEBI revises the Total Expense Ratio (TER) framework or prescribes new limits and guidelines. AMCs are required to align their expense ratios with these regulations.
For Regular plans, the commission paid to distributors may be revised based on the AMC’s distribution strategy, which can impact the expense ratio.
Impact of expense ratio
The table below compares the impact of expense ratios in top-performing regular and direct mutual fund plans, illustrating how choosing the same fund under different plan types can significantly affect long-term investment returns. The difference in returns between direct and regular mutual funds is because of the TER.
Regular funds:
| Funds | 10-year SIP returns in % | Rs 10,000 SIP would have grown to approx | Expense ratio in % |
| Quant Small Cap Reg | 24.51 | Rs 43.25 lakh approx | 1.33 |
| Nippon India Small Cap Reg | 21.43 | Rs 36.68 lakh approx | 1.13 |
| Quant Multi Asset Allocation Reg | 21.08 | Rs 35.98 lakh approx | 1.54 |
| Bank of India Manufacturing & Infra Reg | 20.78 | Rs 35.42 lakh approx | 1.96 |
| Invesco India Mid cap Reg | 20.63 | Rs 35.14 lakh approx | 1.45 |
Direct funds:
| Direct funds | 10-year SIP returns in % | Rs 10,000 SIP would have grown to approx | Expense ratio in % |
| Quant Small Cap Dir | 25.65 | Rs 46.69 lakh approx | 0.63 |
| Nippon India Small Cap Dir | 22.47 | Rs 38.76 lakh approx | 0.52 |
| Quant Multi Asset Allocation Dir | 22.43 | Rs 38.67 lakh approx | 0.55 |
| Bank of India Manufacturing & Infra Dir | 22.40 | Rs 38.63 lakh approx | 0.61 |
| Invesco India Mid cap Dir | 22.24 | Rs 38.29 lakh approx | 0.48 |
Source: Value Research as of 4th August 2026
The data clearly shows how a lower expense ratio in direct plans can significantly improve long-term wealth creation. Although the difference in annual expense ratios between regular and direct plans appears small, its impact compounds over time, leading to substantially higher SIP returns.
For instance, a Rs 10,000 monthly SIP in Quant Small Cap Fund would have grown to around Rs 43.25 lakh under the regular plan, compared with approximately Rs 46.69 lakh under the direct plan, a difference of over Rs 3.4 lakh.
Similarly, investors in Nippon India Small Cap Fund would have accumulated nearly Rs 2.1 lakh more through the direct plan, while Quant Multi Asset Allocation, Bank of India Manufacturing & Infra, and Invesco India Mid Cap also show a wealth gap of around Rs 3 lakh or more in favour of direct plans.
These figures illustrate that even a seemingly modest reduction in expense ratio can translate into a meaningful increase in long-term corpus.
Why do expense ratios differ between regular vs direct mutual funds?
The primary difference between regular & direct funds is distribution cost; regular plans are typically offered by distributors, financial advisors, banks, or brokers.
AMC pays them a commission for servicing investors, like onboarding them, providing investment advice, facilitating transactions, servicing accounts, and offering ongoing support.
Whereas Direct plans are purchased directly from the AMC without any intermediary. Since there is no distributor commission, Direct plans have a lower expense ratio.
What should be the ideal expense ratio that an investor should consider?
An ideal expense ratio depends heavily on the fund an investor is selecting.
Investors who are not comfortable selecting funds, monitoring performance, or periodically reviewing and rebalancing their portfolio should consider investing through a financial advisor.
“Regular plans carry a slightly higher expense ratio because they include the cost of professional advice, portfolio construction, and ongoing review, which can add significant value over the long term. Investors who have the knowledge, time, and discipline to research funds, build a diversified portfolio, and rebalance it regularly can opt for direct plans, which have lower expense ratios,” said Amitabh Lara, Executive Director, Anand Rathi Wealth.
“However, many DIY investors either make behavioural mistakes or rely heavily on passive funds, expecting them to outperform. Passive funds are designed to mirror the benchmark and generally do not generate alpha after costs,” Lara further added.
Conclusion
For investors, it is important to note that a change in expense ratio does not require any action on their part; investors should focus on the fund’s consistent net performance, risk-adjusted returns, and suitability for their financial goals, rather than choosing a fund based solely on its expense ratio.
Disclaimer: This article is for informational purposes only and should not be construed as investment advice. Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully before investing.
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