Expense Ratio Calculator

Every mutual fund charges a yearly fee for running the portfolio, called the expense ratio. It is a percentage of the assets, taken out of the fund’s value a little every day, so your return is the portfolio’s return minus the ratio. A fund that makes 12 percent before costs and charges 1.5 percent gives you 10.5 percent. The difference between a low-cost and a high-cost version of the same fund looks small each year and large after many years. This calculator puts a figure on it.

Direct and regular plans

Many funds, notably in India, are offered in two versions. The regular plan includes a commission paid to the distributor or adviser who sold it, so its expense ratio is higher. The direct plan is bought straight from the fund house and has no commission, so its ratio is lower. The portfolio and the manager are the same. The page asks for both ratios, and a gap of about one percentage point is typical.

The calculation

The net return of a plan is the return before costs minus its expense ratio. The page then compounds that net return monthly. For a SIP, each instalment is invested at the start of the month; for a lump sum the whole amount is invested at the start. Both plans use the same amounts, the same gross return and the same dates, so the only thing that differs is the ratio. The gap is then purely the cost of the higher fee.

A worked example

The defaults are a 10,000 SIP for 15 years, a return of 12% before costs, an expense ratio of 0.5% for the direct plan and 1.5% for the regular plan. Total invested is 18,00,000. The direct plan, at 11.50% net, grows to 48,10,828, and the regular plan, at 10.50% net, to 43,78,276. The extra wealth in the direct plan is 4,32,552, so the regular plan ends 9.0% lower, and the extra fee takes 14.4% of the total gains. In year one the difference is only 695, in year two 2,879 and in year three 6,888. For a lump sum of 10,00,000 over 20 years at 11% before costs, the direct plan reaches 80,91,918 and the regular plan 66,36,061, a gap of 14,55,856 or 18.0%.

Why the gap grows faster than the years

Fees compound, just as returns do. A fee not paid in year one stays invested and earns returns in every later year. Meanwhile the fee takes a larger absolute amount as the portfolio grows. So the difference rises slowly at first and then quickly, which the year-by-year table makes visible. Long investment horizons make costs far more important than they appear in any one year.

Using the result

Use the figure as one input to a decision, not the only one. A regular plan comes with advice, and for some investors that guidance has real value in keeping them invested and avoiding mistakes. For those who are comfortable choosing and monitoring funds themselves, the direct plan keeps the commission. Compare ratios on the fund’s factsheet, which states the latest figures, and enter them here.

Limits

The ratio is subtracted from a constant gross return, whereas real fund returns vary year to year. Exit loads, taxes, transaction costs inside the fund and differences in the performance of two funds are not part of the calculation. A fund with a lower ratio can still be a worse fund, because the ratio is only one part of what it delivers.

Related tools

• SIP Calculator shows the growth of the same monthly investment with a single rate.
• Lump Sum vs SIP Calculator compares investing all at once with instalments.
• CAGR Calculator lets you check the growth rate that a fund actually delivered.
• Compound Interest Calculator shows the compounding behind both returns and costs.