"Why did my friend's Rs 10 lakh grow to Rs 45 lakh while mine only reached Rs 38 lakh? We invested in similar funds."
We hear this question often in our WhatsApp community. The answer almost always lies in one overlooked number: the expense ratio. That small percentage difference silently ate away Rs 7 lakh over 15 years.
At Belong, we've spent years helping NRIs understand the true cost of investing. Not just the obvious fees, but the hidden charges that compound against you.
This guide covers everything: what expense ratio actually means, SEBI's December 2025 rule changes, direct vs regular plans, and the costs most investors never see coming.
By the end, you'll know exactly how to evaluate mutual fund costs and keep more of your returns.
Why Should NRIs Care About Expense Ratio?
The expense ratio is what the mutual fund charges you annually for managing your money. It covers management fees, administrative costs, marketing expenses, and operational charges. (AMFI)
Here's what makes this critical for NRIs specifically:
You're already dealing with currency conversion costs when sending dirhams to India. Add TDS on redemption, potential double taxation concerns, and the expense ratio becomes another layer eating your returns.
A 1% difference in expense ratio might sound trivial. Over 20 years on a Rs 1 crore investment, it costs you approximately Rs 25-30 lakhs. That's a flat in a Tier-2 city or your child's overseas education fund.
The expense ratio is deducted daily from the fund's NAV (Net Asset Value). You never see a bill. The money disappears before you even know it existed.
👉 Tip: The returns you see on any mutual fund platform are already after expense deduction. The fund's actual performance is higher than what you receive.
Direct Plans vs Regular Plans: The Rs 1.5 Crore Question
This single decision can add or subtract crores from your final wealth. We've seen NRIs in the UAE lose significant money simply because their bank relationship manager put them in regular plans.
What's the Difference?
Direct Plans: You invest directly with the AMC (Asset Management Company). No distributor commission. Lower expense ratio.
Regular Plans: You invest through a bank, advisor, or platform that earns ongoing commission. This commission is built into a higher expense ratio.
A December 2025 research study found that direct plans consistently outperformed regular plans by approximately 1% per year without taking any additional risk. Over 10 years in small-cap funds, direct plans averaged 19.97% CAGR versus 18.48% for regular plans. (Belong Research)
Real Impact on Your Money
Let's calculate this properly. Assume you invest Rs 25,000 monthly for 25 years at 12% expected return:
Plan Type | Expense Ratio | Final Value |
|---|---|---|
Regular Plan | 1.8% | Rs 3.2 crore |
Direct Plan | 0.9% | Rs 4.7 crore |
The 0.9% difference resulted in Rs 1.5 crore less wealth. Same fund. Same market returns. Just different expense ratios.
Why Do Banks Push Regular Plans?
Simple economics. When you invest Rs 10 lakh through your UAE bank's wealth desk, they earn Rs 10,000-15,000 annually as trail commission. Every year. For doing nothing after the initial sale.
This isn't illegal or unethical. But you should know what you're paying for.
👉 Tip: If you already hold regular plans, you can switch to direct plans of the same fund. No capital gains tax applies for this switch, though exit load may apply if held under 12 months. Belong offers direct plan access for NRIs.
What's Included in the Total Expense Ratio (TER)?
Understanding what you're paying for helps evaluate whether it's worth the cost.
Under SEBI regulations, the TER includes:
Component | Purpose |
|---|---|
Management Fee | Paying the fund manager and research team |
Administrative Costs | Record-keeping, accounting, customer service |
Custodian Fees | Safekeeping securities with a custodian bank |
Registrar Fees | Maintaining your investment records |
Marketing & Distribution | Commission to distributors (in regular plans) |
Audit & Legal | Annual compliance costs |
The TER is calculated as a percentage of the scheme's average Net Asset Value and disclosed daily on AMC websites. (AMFI)
What TER Does NOT Include
Several costs fall outside the expense ratio but still impact your returns:
Exit Load: Fee for redeeming before a specified period. Typically 1% if you exit equity funds within 12 months. SEBI reduced the maximum from 5% to 3% in September 2025. (SEBI)
Stamp Duty: 0.005% on all mutual fund purchases since July 2020. (ClearTax)
Securities Transaction Tax (STT): 0.001% when selling equity fund units.
Capital Gains Tax: Not a fund cost, but critical for NRIs. Understand taxation on mutual fund returns before investing.
SEBI's December 2025 Changes: What You Must Know
On December 17, 2025, SEBI approved a major overhaul of mutual fund expense norms. These changes take effect in 2026 and will reduce your costs. (Business Today)
Key Changes
1. New Definition: Base Expense Ratio (BER)
The TER has been redefined as Base Expense Ratio (BER). Statutory levies like GST, STT, stamp duty, and SEBI fees are now shown separately. (Angel One)
This means more transparency. You'll see exactly what goes to the fund house versus what goes to the government.
2. Reduced Expense Caps
Fund Category | Old Limit | New Limit |
|---|---|---|
Index Funds & ETFs | 1.00% | 0.90% |
Fund of Funds (Equity) | 2.25% | 2.10% |
Close-ended Equity | 1.25% | 1.00% |
3. Lower Brokerage Limits
Cash market transaction brokerage reduced from 12 bps to 6 bps. Derivative transaction brokerage reduced from 5 bps to 2 bps.
4. Removal of Extra Exit Load Allowance
The additional 5 basis points charge that fund houses could levy on exit-load schemes has been scrapped. (Upstox)
What This Means for You
Lower costs and better transparency. If your fund's expense ratio drops, your returns automatically improve. Check your fund factsheets after April 2026 for updated TER.
How Much Should You Pay? Category Benchmarks
Different fund categories justify different expense ratios. A small-cap fund managing obscure companies requires more research than an index fund that simply mirrors Nifty 50.
Equity Fund Benchmarks
Category | Reasonable TER (Direct) | Red Flag |
|---|---|---|
Large Cap | 0.4-0.8% | Above 1.2% |
Flexi Cap | 0.5-0.9% | Above 1.3% |
Mid Cap | 0.5-1.0% | Above 1.4% |
Small Cap | 0.6-1.2% | Above 1.5% |
Index Funds | 0.1-0.3% | Above 0.5% |
Debt Fund Benchmarks
Category | Reasonable TER (Direct) | Red Flag |
|---|---|---|
Liquid | 0.1-0.2% | Above 0.35% |
Overnight | 0.05-0.15% | Above 0.25% |
Short Duration | 0.2-0.4% | Above 0.6% |
For emergency funds or short-term goals, liquid funds with sub-0.25% expense ratios are ideal. They offer better returns than NRE savings accounts while maintaining high liquidity.
👉 Tip: Compare expense ratios within the same category. A mid-cap fund at 0.8% is cheap; a large-cap fund at 0.8% is average.
Index Funds: The Lowest Cost Option
Index funds track a market index like Nifty 50 without active stock-picking. No expensive research teams. No star fund managers making bets. Just mirror the index.
Fund managers simply replicate the index, keeping expense ratios typically between 0.1%–0.5%, compared to 1.5%–2% for active funds. (Fincash)
Lowest Expense Ratio Index Funds (December 2025)
Fund | Expense Ratio | Benchmark |
|---|---|---|
Bandhan Nifty 50 Index Fund | 0.10% | Nifty 50 |
ICICI Prudential Nifty 50 Index | 0.17% | Nifty 50 |
UTI Nifty 50 Index Fund | 0.18% | Nifty 50 |
Motilal Oswal Nifty Midcap 150 | 0.20% | Nifty Midcap 150 |
Should NRIs Choose Index Funds?
According to SEBI and AMFI reports, over 70% of active large-cap mutual funds in India failed to outperform their benchmark indices in the last three years. (Echoloom)
For NRIs who cannot actively monitor investments from abroad, index funds remove fund manager risk. You're betting on India's growth story, not on whether one person makes good decisions.
The limitation: Index funds cannot outperform the market. During bull runs, some actively managed funds will deliver higher returns.
Our recommendation: Use index funds for your core large-cap exposure. Consider active funds selectively for mid/small cap categories where skilled managers can add value.
The Hidden Costs Most NRIs Miss
Expense ratio is just the visible cost. Several charges operate in the shadows.
1. SIP Exit Load Trap
Most equity funds charge 1% exit load if redeemed within 12 months. What many NRIs don't realize: for SIPs, each installment is treated separately.
If you started a SIP in January 2025 and want to exit completely in August 2025, only your January installment is exit-load free. Your February-August installments will still attract 1% penalty.
2. Currency Conversion Costs
When you send AED to India for investing, the exchange rate spread can range from 0.5% to 2% depending on your remittance method.
Use cost-effective transfer options to minimize this. Some NRIs lose more in poor exchange rates than they save by choosing low-expense funds.
3. Transaction Charges
Some platforms charge Rs 100-150 for lump sum investments above Rs 10,000 when routed through distributors. Direct plans don't have this charge.
4. Demat Account Fees
If you hold mutual funds in Demat form (common for NRIs using broker platforms), you may pay:
- Annual maintenance: Rs 300-500
- Transaction charges per order
- DP charges for unit movements
5. TDS on Redemption
For NRIs, TDS (Tax Deducted at Source) is deducted before you receive redemption proceeds:
- Short-term gains: 20% TDS
- Long-term gains above Rs 1.25 lakh: 12.5% TDS
This isn't an expense ratio issue, but it affects your net returns significantly. DTAA benefits can help UAE NRIs reduce this burden.
👉 Tip: Calculate your total cost of ownership: expense ratio + exit load (if applicable) + currency conversion + TDS impact. This gives you the true cost picture.
When Higher Expense Ratios Are Worth Paying
Low expense ratio doesn't automatically mean better investment. A fund charging 1.2% but delivering 18% returns beats a fund charging 0.5% but delivering 10% returns.
Scenarios Where Higher Costs May Be Justified
1. Small Cap Funds
Researching smaller companies requires more work. If a fund manager consistently delivers 5%+ alpha (excess returns over benchmark), the higher fee is justified.
2. International Diversification
Funds like DSP Global Equity Fund provide access to global markets. The additional costs for currency hedging and foreign market research can be worthwhile for diversification.
3. Specialized Strategies
Thematic funds focusing on specific sectors like technology or healthcare require specialized expertise.
The Key Metric: Risk-Adjusted Returns
Don't compare expense ratio alone. Compare:
Alpha = Fund Return - Benchmark Return
If a fund charges 0.8% more than an index fund but consistently delivers 2% alpha, you're still ahead.
Check 5-year rolling returns, not just point-to-point returns. Learn how to evaluate past performance correctly.
How to Find and Compare Expense Ratios
Step 1: Check Fund Factsheets
Every AMC publishes monthly factsheets with current expense ratios. SEBI mandates daily TER disclosure on AMC and AMFI websites.
Step 2: Use Comparison Platforms
These tools show expense ratios across funds:
Step 3: Verify Direct vs Regular
When comparing, ensure you're looking at the same plan type. Fund names include "Direct" or "Regular" - double-check before investing.
Step 4: Track Historical Changes
Expense ratios can increase. A fund that was cheap three years ago might have raised fees. Review annually.
GIFT City Alternative: Tax-Free Investing for NRIs
For UAE-based NRIs, there's an option most people don't know about: GIFT City mutual funds.
Why GIFT City?
- No capital gains tax for NRIs/OCIs
- USD-denominated investing eliminates currency risk
- Simplified compliance under IFSCA regulations
- Tax benefits make the effective expense lower
Consider this: A regular Indian mutual fund charges 1% expense ratio plus you pay 12.5% LTCG tax on gains. A GIFT City fund might charge slightly higher expense but with zero capital gains tax, your net returns could be better.
Funds like Tata India Dynamic Equity Fund are now available through GIFT City with just $500 minimum investment.
Use Belong's Compliance Compass to check if GIFT City investing suits your situation.
Our 5-Step Framework for Cost-Conscious Fund Selection
Here's the process we recommend to NRIs in our community:
Step 1: Define Your Goal
Match your investment timeline to the right fund category. Don't compare costs across different categories.
Step 2: Filter by Category Benchmark
Set maximum expense ratio based on category:
- Large Cap: Below 0.8% (direct)
- Mid Cap: Below 1.0% (direct)
- Small Cap: Below 1.2% (direct)
- Index: Below 0.3% (direct)
Step 3: Calculate Value-for-Money
Formula: (5-year CAGR - Category Average) / Expense Ratio
Higher number = better value. A fund charging 1% but beating category by 3% offers better value than one charging 0.5% but only beating category by 1%.
Step 4: Add Hidden Costs
Calculate total cost: Expense Ratio + Exit Load (if redeeming early) + Currency Conversion Cost + TDS Impact
Step 5: Verify NRI Accessibility
Not all platforms support direct plans for NRIs. Confirm before investing. Belong offers direct plan access designed for non-residents.
Common Mistakes We See NRIs Making
Mistake 1: Choosing Lowest Expense Ratio Blindly
A fund with 0.2% expense but 8% returns is worse than one with 0.8% expense but 14% returns. Cost efficiency matters, not absolute cost.
Mistake 2: Staying in Regular Plans
A 1% difference in expense ratio costs Rs 1 lakh annually on a Rs 1 crore investment. (Belong Guide) Switch to direct plans if you're comfortable managing investments independently.
Mistake 3: Ignoring Exit Load Timing
If you might need money within a year, exit load effectively adds 1% to your cost. For retirement planning, this matters less.
Mistake 4: Not Reviewing Annually
Fund houses can increase expense ratios. An initially cheap fund might become expensive. Check factsheets every year.
Mistake 5: Overlooking GIFT City Tax Savings
For UAE NRIs, GIFT City's zero capital gains tax can offset slightly higher expense ratios and still deliver better net returns.
Your Next Steps
Every rupee saved in expenses is a rupee that compounds for you. Over 20-30 years, that's the difference between a comfortable retirement and a stretched one.
Here's what we recommend:
- Audit your current funds - Check if you're in regular or direct plans
- Calculate your total cost - Expense ratio + hidden fees + tax impact
- Switch to direct plans if you're paying unnecessary commissions
- Consider GIFT City for tax-efficient investing
If you found this guide helpful, join our WhatsApp community where NRIs discuss investment strategies, share experiences, and get answers to specific questions.
Use Belong's NRI FD Comparison Tool and Mutual Funds Explorer to compare options.
Download the Belong app to access cost-efficient investment options built specifically for NRIs.
Author: Ankur Choudhary, CEO & Co-founder, Belong
IIT Kanpur alumnus, SEBI-registered investment advisor with 12+ years helping NRIs make smarter financial decisions.
Published: December 2025
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