Guide
What a Mutual Fund Really Costs
Returns are uncertain; costs are guaranteed. Every rupee of fee comes straight out of your return, every year, whether the fund does well or not — so understanding cost is one of the few edges fully in your control. Here are the four costs that matter, with examples.
Total Expense Ratio (TER) — the headline annual fee
TER bundles everything it costs to run a fund — management, admin, and (in Regular plans) distributor commission — into one annual percentage, deducted quietly from the NAV.
Example. A fund with a TER of 1.5% charges ₹1,500 a year on every ₹1,00,000 invested. You never get a bill — it's shaved off the NAV daily. Index funds run ~0.1–0.5%; active Direct plans ~0.5–1.2%; active Regular plans ~1.5–2.25%.
How to read it: lower is better for the same fund, but don't pick on TER alone — a slightly pricier fund with real skill can still win. The point is that a manager must out-perform by at least their TER just to match a cheap index fund.
Direct vs Regular — the same fund at two prices
Every scheme comes in two variants: a Direct plan (bought from the AMC, no commission) and a Regular plan (bought through a distributor who earns an ongoing commission baked into the TER). Identical portfolio, identical manager — different fee.
Example. Invest ₹10,00,000 for 20 years at a 12% gross return. At a Direct-plan TER, you might end with roughly ₹89 lakh. At a Regular-plan TER that's 1% higher, you'd end closer to ₹75 lakh — a gap of about ₹14 lakh, purely from the commission, for the exact same fund. That's the power of compounding working against you.
How to read it: for a confident DIY investor, choosing Direct is one of the highest-certainty improvements available — a guaranteed saving, not a bet.
Exit load — the penalty for leaving early
An exit load is a fee charged if you redeem before a set period, to discourage short-term trading.
Example. A fund charges a 1% exit load if you exit within one year. Redeem ₹50,000 after eight months and ₹500 is deducted — you receive ₹49,500. Wait past a year and you pay nothing. Each SIP instalment has its own holding-period clock.
How to read it: exit loads are normal and modest — not a reason to avoid a fund, but a reminder to match the fund to your time horizon.
Portfolio turnover — the hidden trading cost
Turnover measures how often the manager buys and sells holdings in a year. Every trade incurs brokerage and taxes that drag on returns and aren't fully captured in the TER.
Example. A 100% turnover means the manager effectively replaced the entire portfolio once during the year — lots of trading, lots of hidden cost. A 20% turnover means a patient buy-and-hold approach, with only a fifth of holdings changed. The high-turnover manager must add enough value to overcome those extra costs.
How to read it: activity isn't skill. High turnover with mediocre stock-picking is just expensive churn that you pay for whether or not it works.
Why it matters
You pay a fund's fee on all your money — but if most of the fund behaves like its index, most of that money could sit in an index fund for much less. Spread the extra fee over just the truly active part, and that part can cost several percent a year. That's the number we show on the Clara homepage.
Educational information only, not investment advice. Mutual funds are subject to market risk; past performance may or may not be sustained in the future. Consult a SEBI-registered investment adviser for advice specific to you.