Mutual Fund Expense Ratio and NAV Explained: How NAV Works, What TER Costs You and Direct vs Regular Plans

NAV is the per-unit value of a fund. TER equals base expense ratio plus brokerage and levies under SEBI’s 2026 rules. Direct plans skip distributor commission, so their TER is lower.

The mutual fund expense ratio is the cost most investors never see on a statement, because it is deducted inside the fund’s NAV. A difference of even one percentage point can make a large gap in the corpus after twenty years.

This guide explains how NAV works, what the expense ratio includes after the 2026 SEBI rules and how to choose between direct and regular plans.

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What Is NAV in a Mutual Fund?

NAV, or net asset value, is the price of one unit of a fund. It is calculated by taking the market value of all holdings, adding cash, subtracting liabilities and expenses and dividing by the number of units. The NAV is declared at the end of each business day.

A low NAV does not mean a fund is a bargain or a high NAV means it is costly. If you invest Rs 10,000 in a fund with a NAV of 10 or a NAV of 100, you will earn the same percentage return if the portfolios behave the same. What matters is the growth of the NAV, not its level.

What Is the Mutual Fund Expense Ratio?

The expense ratio, also called the total expense ratio or TER, is the annual charge that covers running the fund. It pays the fund manager, administration, registrar services and, in regular plans, distributor commission. It is expressed as a percentage of average assets and is deducted daily from the NAV.

What the 2026 Rules Changed

SEBI’s Mutual Funds Regulations 2026, effective 1 April 2026, redefined the structure. The total expense ratio now equals the base expense ratio plus brokerage and transaction costs plus regulatory levies and statutory levies. Caps on brokerage were reduced, and an additional charge of 5 basis points that some funds could earlier levy was removed.

• Base expense ratio covers the core cost of running the fund.
• Brokerage on trades is shown separately and capped.
• Regulatory and statutory levies are listed as their own items.
• Performance-linked fees are optional for funds.

The result is a clearer view of what you pay. When comparing funds, look at the total figure and also at the base portion, because brokerage can vary with how often the fund trades.

Direct Plan vs Regular Plan

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Both plans hold the same portfolio. The only difference is the cost. Over long periods, the gap in expense ratio compounds into a visible difference in returns.

How Much Does the Expense Ratio Matter?

Take an equity fund that earns 12% before costs. With a 0.5% expense ratio you earn about 11.5%, and with 1.5% you earn about 10.5%. On a long investment, that single point can reduce the final amount by a large margin. Index funds and ETFs often have very low expense ratios, which is one reason for their popularity among cost-conscious investors.

A lower cost does not always mean better. An actively managed fund with a higher expense ratio may still be worth it if it consistently beats its benchmark after costs. Compare it with the Nifty 50 index fund return over the same period.

How to Check and Compare Expense Ratios

1. Open the fund’s factsheet on the AMC website or a research platform.
2. Note the expense ratio for the plan you hold, direct or regular.
3. Compare it with similar funds in the same category.
4. Check how it has changed over time.
5. Weigh it against returns, risk and consistency.

Also check the exit load, which is a separate charge when you redeem early and not part of the expense ratio.

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Conclusion

The mutual fund expense ratio is a small percentage with a large long-term effect. It is deducted daily from the NAV, and under the 2026 rules it is shown as a base expense ratio plus brokerage and levies.

Prefer direct plans if you can choose funds on your own, compare similar funds on cost and returns, and ignore the myth that a low NAV is a bargain.

Frequently Asked Questions

What is NAV in mutual funds?

Ans. NAV is the net asset value per unit. It is the total value of the fund’s holdings plus cash minus liabilities, divided by the number of units, and it is declared at the end of each business day.

Is a low NAV better than a high NAV?

Ans. No. The level of NAV does not decide returns. A fund with a NAV of 15 and a fund with a NAV of 150 can give the same percentage return. Compare performance, risk and costs instead.

What is included in the total expense ratio?

Ans. Under the 2026 regulations, TER includes the base expense ratio, brokerage and transaction costs, and regulatory and statutory levies. The structure aims to show costs more clearly.

Is the expense ratio charged separately from my investment?

Ans. No. It is deducted from the fund’s assets every day, so it is already reflected in the NAV. You do not see a separate bill, which is why it is easy to overlook.

Why does a direct plan cost less than a regular plan?

Ans. A direct plan has no distributor commission built into its expense ratio. Because the portfolio is the same, the lower cost leads to a higher NAV over time.

What is a good expense ratio for a mutual fund?

Ans. It depends on the category. Index funds and ETFs usually charge very little, while actively managed funds charge more. Compare a fund against others in the same category and look at net returns.

Is exit load part of the expense ratio?

Ans. No. Exit load is a separate charge applied when you redeem units within a specified period. The expense ratio is an ongoing annual cost, while the exit load is a one-time cost on early exit.