Expense ratio drag
How Total Expense Ratio compounds against corpus growth over time — a small annual fee becomes a large wealth transfer over decades.
Expense ratio drag is not a risk metric — it is a certainty. Every basis point of TER is deducted from the fund's NAV daily, silently compounding against you over the life of your investment. Understanding the cumulative impact is essential, particularly for long-horizon investors and NRIs who may hold funds for 15–20+ years.
What it measures
Expense ratio drag quantifies the difference in terminal corpus between a fund with TER e and a hypothetical zero-cost equivalent earning identical gross returns. It shows, in rupees and percentages, exactly how much of your final wealth is consumed by fees over the investment horizon.
How it is computed
Given gross return r_gross, TER e, and investment period n years, with initial investment P:
Net corpus = P × (1 + r_gross − e)^n
Gross corpus = P × (1 + r_gross)^n
Drag = Gross corpus − Net corpus
Drag % = 1 − (1 + r_gross − e)^n / (1 + r_gross)^n
Example (₹10 lakh investment, 12% gross return, 20 years):
| TER | Net corpus | Drag vs. 0% TER |
|---|---|---|
| 0.10% (index ETF) | ₹95.7 L | −₹1.6 L (1.6%) |
| 0.50% (direct index) | ₹91.5 L | −₹5.8 L (6%) |
| 1.00% (direct active) | ₹86.4 L | −₹11.0 L (11%) |
| 1.75% (regular plan) | ₹78.1 L | −₹19.2 L (20%) |
| 2.25% (regular active) | ₹72.8 L | −₹24.5 L (25%) |
At 2.25% TER over 20 years, roughly one-quarter of your final corpus is consumed by fees. This is the arithmetic of compounding working against you.
How to interpret
- SEBI TER caps (equity funds, direct plan): ≤ 1.05% for AUM > ₹50,000 Cr; up to 2.25% for small funds. Regular plans add ~0.5–1.0% distributor commission on top.
- Direct vs. Regular: For a 20-year horizon and 1% TER difference, switching from regular to direct can preserve 10–15% of terminal corpus. This is the single most impactful actionable insight for long-term investors.
- TER and alpha: A fund needs to generate at least TER% of alpha just to break even with an index fund of the same category. Most large-cap active funds generating 1–2% alpha are just barely keeping pace after their 1.5–2% TER.
Limitations + caveats
TER changes over time — SEBI's slab-based structure means TER can decrease as AUM grows (and it's reset if the fund loses AUM). This analysis assumes constant TER, which understates drag in early years and overstates it if TER falls. Exit loads (typically 1% for redemption within 1 year) are separate from TER and not included in this calculation.
Related metrics
- TER Drag — alias for this article; same calculation.
- AUM Decay — how large AUM can erode a fund's alpha; the other side of the fee-vs-performance equation.
- Alpha — the excess return a fund must generate to justify TER above an index fund.
Sources
TER data: AMFI monthly TER disclosures (mandatory under SEBI circular SEBI/HO/IMD/DF2/CIR/P/2018/67). Historical TER tracked in MintByte scheme master; drag calculation performed at scheme level using latest disclosed TER and user-specified horizon.