When it comes to investing in a mutual fund, we generally first look at the returns the particular fund has given over different time periods, the reputation of the fund house, and the experience of the fund manager, among other key things. All these things are justified because, after all, we have to use our money properly.
But one small thing often slips out of our minds is ‘expense ratio’. This is the fee that the fund house charges you every year in exchange for managing the investment. It seems like a small amount, but in effect, it can slowly eat away at your earnings.
For example, if the expense ratio of a fund is 1%, it means that Rs 1 will be deducted as an annual charge for every Rs 100 invested. This charge is directly adjusted in the Net Asset Value (NAV) of the fund – that is, the investor does not have to pay separately.
If we talk about the market situation over the last 7 months, equities globally remained under constant pressure. In the domestic market, frontline equity indices fell significantly, and the performance of equity funds was badly impacted. In such times, the importance of every single percent increases. The expense that first affects your returns is the expense ratio.
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Think about it — if a fund has a high fee, it will have to earn more accordingly. But when the market itself is sluggish, it is not easy for such a fund to give better returns.
Why does the expense ratio become the most important factor in a volatile market?
When the market is volatile, every small expense affects your total return. In such a situation, funds with a higher expense ratio have to perform equally well to cover that expense.
Now let’s talk about those funds whose expense ratio is low and have also given better returns. The funds we have shortlisted to feature in the story are based on two metrics: low expense ratio and best 5-year returns. So we have considered for the ranking (top 5 low expense ratio funds) only those schemes that have existed in the market for at least 5 years. All these funds mentioned below have delivered more than 20% and up to 26% returns in the last 5 years.
Top 5 equity mutual funds with the lowest expense ratio and the best 5-year returns in 2025
1. PGIM India Flexi Cap Fund – Direct Plan
Expense ratio: 0.43%
5-year return: 25.86%
2. Navi Flexi Cap Fund – Direct Plan
Expense ratio: 0.43%
5-year return: 21.94%
3. Baroda BNP Paribas Focused Fund – Direct Plan
Expense ratio: 0.48%
5-year return: 21.87%
4. Edelweiss Flexi Cap Fund – Direct Plan
Expense ratio: 0.49%
5-year returns: 26.46%
5. Canara Robeco Flexi Cap Fund – Direct Plan
Expense ratio: 0.56%
5-year returns: 22.63%
(Data: Value Research)
Besides the expense ratio, what other things should new investors pay attention to?
Apart from the expense ratio, if you are a new investor, do not invest only by looking at the fees. You should also pay attention to things like long-term performance of the fund, experience of the fund manager, risk profile of the fund, total assets under management, fund category and investment objective, etc.
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Summing up…
In the current market conditions, where equity funds are facing constant pressure, expense ratio can play a decisive role. If you are a prudent investor and choose funds keeping in mind every market move, then funds with low expenses can prove to be more beneficial for your portfolio in the long run.