If you are thinking about investing your hard earned money in mutual funds and want to keep more of your returns in your pocket then expense ratio is one of the most important terms you must understand. In this guide we are going to talk about low expense ratio mutual funds in India in a way that is simple and useful. We will explain what expense ratio means why it matters how to choose the right funds and which ones are known for low cost. This is written for Indian parents students new investors and anyone who wants to get more value from their investments.
Let us begin with an easy idea and then slowly build up to real insights that most blogs do not cover.
What Is an Expense Ratio
Definition and Purpose
When you invest in a mutual fund the fund house charges you a small fee every year for managing your money. This fee is called the expense ratio. It is expressed as a percentage of your total investment value. For example if you have 100000 rupees in a fund and the expense ratio is 1 then you pay 1 of the fund value every year toward costs.
These costs pay for things like fund managers portfolio administration record keeping and other fund operations. Expense ratio is very important because it comes out of your money before returns are credited to you.
Top Low Expense Ratio Index Funds
| Fund Name | Expense % |
|---|---|
| Axis Nifty 50 Index Fund | 0.20% |
| ICICI Prudential Nifty Fund | 0.23% |
| Tata Index Sensex Fund | 0.21% |
How It Is Calculated With a Simple Formula
Here is a simple way to think about it.
If your fund has 100000 rupees and the expense ratio is 1 in a year you will pay 1000 rupees that year as fees. This is taken from the fund itself and you do not see a separate bill.
The formula looks like this
Expense Ratio X Fund Value = Fee Paid
This might look small in one year but over many years it can become a large cost.
What Is Included in Expense Ratio
Expense ratio covers things like portfolio management fees accounting costs audit fees registrar charges and marketing costs. It does not include entry or exit loads and taxes. If you want the official explanation you can check the SEBI guidelines for mutual funds on the Securities and Exchange Board of India website.
Expense Ratio Versus Other Fees
Expense ratio is different from entry load exit load brokerage or taxes. Entry load is fee when you enter a fund exit load is fee when you leave a fund. SEBI has removed entry loads in India but exit loads may still apply in some cases. Because expense ratio is recurring cost over many years it has a large impact on long term returns.
Why Low Expense Ratio Matters for You
Cost Erodes Your Returns
Let us look at a simple example. Suppose two funds give the same investment returns before fees but one has an expense ratio of 0.3 and the other has 1. Over a long period the fund with lower expense will leave more money in your pocket. This difference compounds year after year.
If you keep money for 10 or 15 years then the cost difference will not be small any more. It will be a big amount that you could have saved or reinvested.
Direct Plan Advantage Over Regular Plan
In India mutual funds offer direct plans and regular plans. Direct plans have no distributor commission and therefore come with lower expense ratios. This makes direct plans cheaper for long term investors. If you are investing through an online platform like Groww or Zerodha always choose the direct plan option because that is where you pay the least expense ratio.
Compound Savings Over Time
Lower expense ratio means you pay less every year. So more money stays invested and grows with compounding. Over long term a small difference in cost can lead to large differences in final wealth. This is one reason why many experienced investors focus first on cost before returns.
What Experts Say Do Low Costs Guarantee Success
It is true that low cost helps but it is not the only factor. A fund with very low expense ratio may not perform well if it has poor investment strategy. Many articles on investing like those on Investopedia explain that low cost is important but quality of management and consistency of performance matter too. So the smart way to invest is to consider cost as one factor among others.
Direct Plan vs Regular Plan Cost Difference
| Fund Name | Direct | Regular |
|---|---|---|
| SBI Bluechip | 0.94% | 1.82% |
| HDFC Nifty 50 | 0.20% | 1.05% |
How to Decide What a “Good” Expense Ratio Is for You
Benchmarking by Fund Type
Not all funds have the same expense ratio. It varies by type of fund.
Index Funds versus Active Funds
Index funds follow a market index and require less research and trading. So their costs are usually lower than actively managed funds where fund managers buy sell and rebalance more often.
Equity versus Debt Funds
Equity funds often have higher costs than debt funds because managing equity portfolios requires more research and monitoring.
A good rule of thumb is to check what other funds in the same category are charging and compare.
A Good Mid Range vs Very Low Expense Ratio
For index funds anything under 0.25 is considered very good in India. For actively managed equity funds expense ratios under 1 might be acceptable depending on performance. For debt funds it can be even lower.
Remember most direct plans will have lower cost than regular plans. So always compare direct plan expense ratios.
Best Low Expense Ratio Mutual Funds in India for 2025
In this section we will talk about some funds that are known for their low expense ratio. We will group them by category.
Top Low Expense Ratio Equity Funds
There are equity index funds in India that follow benchmarks like NIFTY 50 NIFTY Midcap NIFTY Smallcap and more. These funds aim to mirror index returns and because they do not need active management they are cheaper.
Some examples include NIFTY 50 index mutual funds and NIFTY Next 50 index funds with expense ratios well below traditional active funds. You can find a list of these at Smallcase collections on best lower expense ratio mutual funds.
Equity index funds are good if you believe in the long term growth of the Indian market and prefer a low cost way to participate.
Best Low Cost Index Mutual Funds in India
If you are specifically looking for low expense ratio index mutual funds in India this is where you should look. Index funds simply follow an index like NIFTY 50 or Sensex and do not try to beat the market.
This low maintenance means low cost. Many investors prefer these funds because cost savings are automatic and performance usually tracks the broad market.
Check the list of low cost index funds on the Scripbox guide to low cost index funds to see options available.
Low Cost Debt and Hybrid Funds
Debt funds which invest in bonds government securities corporate debt also often have lower expense ratios than equity funds. Some debt funds are used to balance an equity portfolio and add stability.
For example funds that invest in government securities or floating rate funds typically have low expense ratios. Bharat Bond funds are known for very low cost debt exposure.
Hybrid funds which mix equity and debt sometimes also offer lower costs especially those that track hybrid indexes.
Index Funds versus Other Low Cost Funds What’s Best
Index Funds
Index funds are passive by design and one of the easiest ways to keep costs low. They do not try to pick stocks. They buy all stocks in the index and hold them in the same proportion.
This simplicity leads to lower fees and lower expense ratio.
ETFs versus Index Mutual Funds
ETFs or Exchange Traded Funds also track an index and often have even lower expense ratios than mutual funds. But they trade on stock exchanges so you need a DEMAT account and you pay brokerage and taxes when you buy or sell. This extra cost can offset the lower expense ratio for small investors.
So if you are not comfortable trading on an exchange every time you want to buy or sell ETFs then index mutual funds may be more suitable.
When to Choose Actively Managed Funds Even If Expense Ratio Is Higher
There are situations where a good actively managed fund might be worth its higher cost. For example a fund managed by a team with strong research in a niche segment might outperform the index after costs. But this is harder to find and requires research. Again articles on Investopedia explain that low cost is beneficial but performance should not be ignored.
Hidden Costs Things Most Investors Miss
Expense ratio is not the only cost that matters. Some costs are less obvious.
Tracking Error in Index Funds
Tracking error is the difference between the performance of the index and the performance of the index fund. If a fund does not perfectly follow its index the difference is called tracking error. This can be caused by small delays in rebalancing or fund rules. A fund with very low expense ratio but high tracking error might still underperform.
Turnover Costs and Transaction Costs
Funds that trade more often incur higher trading costs. These costs are not shown in the headline expense ratio but reduce returns. If a fund churns its portfolio often you may end up paying indirectly through lower net returns.
Taxes and Charge Caps under SEBI Rules
In India the regulator SEBI keeps rules for how much funds can charge. These include expense ratio caps and how costs are disclosed. You can read SEBI mutual fund regulations on the official SEBI website.
Understanding these rules helps you know that what you see in the expense ratio is the official cost fund houses must report.
Real Investor Experiences and Stories
SIP Case Example 5000 Monthly
Imagine you start a SIP of 5000 rupees every month in two different funds. One fund has an expense ratio of 0.3 and the other has 1.
Over 10 years the cost difference will add up. The fund with lower cost will have more money working for you for a longer period. This teaches us that cost matters more when you invest regularly for long periods.
HNI Investor Perspective
If you have a large corpus then small differences in expense ratio become large amounts of money every year. This makes low cost funds more attractive to high net worth investors who care about absolute costs.
Young vs Retiree Perspective
For young investors time is on their side. Lower costs mean more of their compounding power stays invested. For retirees income and stability may matter more. In both cases understanding how expense ratio affects your goals is important.
Common Mistakes While Choosing Low Expense Ratio Funds
Only Chasing Lowest Cost
Some investors choose the fund with the lowest expense ratio without looking at its strategy performance and risk. This can lead to disappointment if the fund does not suit their goals.
Ignoring Fund Performance and Consistency
A fund with slightly higher cost but consistent good performance may deliver better results than a cheaper but inconsistent one.
Forgetting About Risk Profile
Cost is only one part of the decision. You must match the fund to your risk tolerance and time horizon.
Neglecting Fund Size and Liquidity
Very small funds might struggle to manage big flows and may have higher tracking errors.
Tools and Resources to Compare Expense Ratios Easily
Best Platforms for Fund Comparison
There are tools online where you can compare mutual funds side by side. Websites like Value Research Online and Morningstar help you filter funds by expense ratio returns risk and other criteria. These tools also explain fund history and management teams.
How to Use Expense Ratio Filters Effectively
On these platforms use the filter for expense ratio low to high and then check performance returns. This gives you a quick list of low cost funds that have performed reasonably well.
Checklist Before Investing
Before you invest always check
• Expense ratio
• Fund category and strategy
• Fund performance history
• Risk levels
• Fund size and manager experience
This simple checklist ensures you choose a fund that fits your needs.
Conclusion Best Strategy for 2025 and Beyond
Expense ratio is one of the most important costs you pay when you invest in mutual funds. Choosing a low expense ratio fund especially if you are investing for the long term can make a big difference in your final wealth. But cost should not be the only criterion. You must also consider performance risk strategy and consistency.
For most investors especially parents saving for children education or retirement and students beginning their investment journey choosing low cost index funds and low expense mutual funds through direct plans is a good start. Use the tools we discussed compare funds look at performance and think about how long you want to stay invested.
Investing is a journey and understanding cost is a powerful first step. If you keep expenses low and invest wisely your money has a better chance to grow over time.
Suggested FAQs with Answers
1. Is a lower expense ratio always better in mutual funds?
Not always. While a low expense ratio means lower fees, it should not be your only reason to pick a fund. You should also check the fund’s past performance, consistency, how it tracks its benchmark, and the investment strategy.
A fund with slightly higher expense ratio but better returns and stable management can sometimes be the better choice.
2. What is a good expense ratio for mutual funds in India?
It depends on the fund type. Here’s a quick idea:
- Index Funds: Under 0.3% is considered good
- Debt Funds: Around 0.2% to 0.6%
- Active Equity Funds: Below 1% is decent for direct plans
Always compare with similar category funds before deciding.
3. Why are direct plans cheaper than regular plans?
Direct plans skip the middleman. You invest directly with the fund company, so there are no distributor or advisor commissions.
This results in a lower expense ratio for direct plans. Over many years, this small saving can add up to a big difference.
4. Can a fund’s expense ratio change after I invest?
Yes, mutual fund companies can revise the expense ratio based on total assets under management or SEBI limits.
You should check it once every 6–12 months to stay updated. Platforms like Value Research or Moneycontrol show live data.
5. Does expense ratio affect my SIP returns?
Yes. The lower the expense ratio, the more money stays invested. Over time, this increases your total returns due to compounding.
Even a 0.5% difference in cost can lead to thousands of rupees saved over 10–15 years.
