Low Expense Ratio vs Better Fund Manager - What Matters More

"Should I pay more for a star fund manager, or just pick the cheapest fund?"

This question comes up constantly in our Belong WhatsApp community. NRIs see fund advertisements featuring charismatic managers with impressive track records. 

They see expense ratios ranging from 0.05% to 2.5%. And they wonder which factor actually drives returns.

The data is surprisingly clear. After analyzing over two decades of research from Morningstar, SPIVA, and academic studies, we can say this: the expense ratio is the single best predictor of future fund performance. Not the fund manager's reputation. Not past returns. Not star ratings.

At Belong, we've helped NRIs cut through marketing noise and focus on what actually grows wealth. This guide breaks down the evidence.

What Research Says About Fund Fees and Returns

Morningstar's landmark study made a bold claim: "The expense ratio is the most proven predictor of future fund returns."

Not the most important factor. The most proven predictor.

Their research examined fund performance across every asset class and quintile from 2010 to 2015. The results were consistent:

The cheapest funds were two to three times more likely to succeed than the most expensive funds. This held true across virtually every asset class and time period examined.

Morningstar's 2025 follow-up research confirmed this finding: "Expenses excelled at predicting funds' performance."

👉 Tip: Before comparing fund managers, compare expense ratios first. A fund charging 2% annually needs to beat a 0.5% fund by 1.5% every year just to break even.

Why Higher Fees Often Mean Lower Returns

The math is straightforward but the impact is enormous.

SmartAsset's analysis compared two hypothetical funds with identical 6% returns but different expense ratios: 0.15% vs 0.75%.

Over 30 years, a $10,000 investment:

The difference? Over $8,600 lost to fees. And this was with just a 0.60% expense ratio gap.

The gap widens dramatically with larger investments and longer time horizons. For an NRI with AED 500,000 to invest over 25 years, the difference between a 0.5% and 1.5% expense ratio fund could mean lakhs of rupees left on the table.

This is money that compounds. A fee saved today grows alongside your investment. A fee paid today is gone forever.

What Exactly Is an Expense Ratio?

Before we go deeper, let's clarify what you're paying for.

An expense ratio is the annual fee charged by a mutual fund or ETF to cover operating costs. It includes management fees (paying the fund manager and research team), administrative costs (record-keeping, customer service), marketing and distribution (12b-1 fees), and legal and accounting expenses.

The expense ratio is expressed as a percentage of your investment. If a fund has a 1% expense ratio and you invest Rs 10 lakh, you pay Rs 10,000 annually in fees, regardless of whether the fund makes or loses money.

According to Fidelity, the average expense ratio for equity mutual funds in 2024 was 0.40%, while equity ETFs averaged just 0.14%.

For actively managed funds specifically, recent data shows an asset-weighted average of around 0.59%, though unweighted averages (what you'd find picking randomly) are much higher at 1.10%.

👉 Tip: Check both the "expense ratio" and "total expense ratio" (TER) when comparing funds. Some costs may be hidden in the TER but not the headline expense ratio.

Do "Star" Fund Managers Actually Outperform?

This is where the data gets uncomfortable for active management advocates.

The S\&P SPIVA scorecards have tracked active fund performance against benchmarks for over 20 years. Their most recent findings are stark.

SPIVA's 2024 year-end report found:

"Over the 15-year period ending December 2024, there were no categories in which a majority of active managers outperformed."

Zero categories. Not U.S. large-cap. Not international equity. Not bonds. After 15 years, the majority of professional fund managers in every single category failed to beat their benchmark.

Apollo Global Management's analysis of SPIVA data across global markets found roughly 90% of active equity fund managers underperform their index over 15-year periods.

The 2024 results showed:

• 65% of large-cap U.S. funds underperformed the S\&P 500
• 62% of mid-cap funds underperformed
• 84% of global funds underperformed
• 71% of emerging market funds underperformed

Morningstar's August 2025 report added more recent data: just 21% of active strategies survived and beat their index counterparts over the 10 years through June 2025.

What About Indian Fund Managers?

The Indian market tells a similar story, with some nuances.

SPIVA India's Year-End 2024 Scorecard showed:

The mid-year 2025 update showed 66% of large-cap funds continued to underperform the S\&P India LargeMidCap benchmark.

One bright spot: Indian mid and small-cap funds have historically shown better active management results. The SPIVA India data noted that "Indian Equity Mid-/Small-Cap funds achieved majority outperformance" in H1 2025.

Why might this be? Less analyst coverage, more information inefficiency, and greater stock dispersion create opportunities for skilled managers. But even here, the long-term results trend toward underperformance.

👉 Tip: For Indian large-cap exposure, low-cost index funds often make more sense than high-fee active funds. Consider active management only for mid/small-cap or specialized strategies.

Does Past Performance Predict Future Success?

The investment industry warns "past performance is not indicative of future results." But do investors listen?

Research from the University of Leeds found that participants "persistently chased past performance by choosing the fund that had the highest returns in each previous month." The standard disclaimer had little impact on their decisions.

This is a costly mistake.

Yale School of Management research examined mutual fund data from 1994-2018 and found "there was no statistically significant future return difference between the mutual funds with the best performance over the past year and the mutual funds with the worst performance."

Zero predictive value. The fund that topped last year's charts was statistically no more likely to outperform next year than the fund that ranked worst.

The SPIVA Persistence Scorecard delivers perhaps the most damning finding: "Among top-quartile funds within all reported active domestic equity categories as of December 2020, not a single fund remained in the top quartile over the next four years."

Not one. Zero persistence over four years.

Morningstar's October 2025 persistence study confirmed: "One-year outperformance is a poor predictor of future outperformance. Few funds that ranked in the top quartile of their category maintained that position over the subsequent one, two, or three years."

The Survivorship Bias Problem

When you look at a fund's 10-year track record, you're seeing selective history.

SPIVA research notes that over 20 years, nearly 64% of domestic stock funds and almost two-thirds of international equity funds were shuttered or folded into other portfolios.

The funds that "survived" are naturally the better performers. The failures disappeared from view.

When a fund company merges a poor performer into a better fund, that bad track record vanishes. What remains looks better than reality. This is called survivorship bias, and it makes active management appear more successful than it actually is.

SPIVA India data shows similar patterns: "Over the 10-year period, 55% of Indian Government Bond funds merged or were liquidated."

When comparing fund performance, always ask: "Of all the funds that existed 10 years ago, how many survived AND outperformed?" The answer is almost always less impressive than headline returns suggest.

👉 Tip: When evaluating a fund's long-term track record, check how many funds in that category have been merged or liquidated. High attrition rates suggest survivorship bias is inflating performance numbers.

When Active Management Might Make Sense

We're not saying active management never works. The data suggests specific situations where it has better odds:

Small-cap and micro-cap stocks: Less analyst coverage means more opportunities for skilled managers to find mispriced securities. SPIVA 2024 showed only 30% of small-cap funds underperformed, the lowest rate in over two decades.

Emerging and frontier markets: Information asymmetry is higher, markets are less efficient, and local expertise matters more.

Fixed income in certain environments: SPIVA 2024 showed fixed income managers had a better year, with just 41% underperforming. Categories like investment-grade intermediate bonds and municipal bonds showed stronger active results.

Highly specialized strategies: Convertible arbitrage, distressed debt, and other niche strategies may benefit from manager expertise that isn't easily indexed.

But even in these categories, identifying which managers will outperform in advance remains extremely difficult. And the advantage tends to disappear over longer time horizons.

How to Evaluate Expense Ratios for NRI Investments

For NRIs investing in India, expense ratios vary significantly by fund type and structure.

Direct vs Regular Plans: Indian mutual funds offer "direct" plans (bought directly from the AMC) and "regular" plans (bought through distributors). Direct plans have lower expense ratios, often 0.5-1% cheaper annually. For long-term investors, this difference compounds significantly.

Index Funds vs Active Funds: Indian index funds tracking the Nifty 50 or Sensex typically charge 0.10-0.30%. Active large-cap funds often charge 1-2%. The active fund needs to beat the index by 0.7-1.7% annually just to match the net returns of the index fund.

GIFT City Funds: For NRIs, GIFT City mutual funds offer unique advantages including USD denomination and potential tax benefits. Expense ratios vary, so compare carefully. Funds like the DSP Global Equity Fund or Tata India Dynamic Equity Fund provide diversified exposure.

Use Belong's Mutual Funds Explorer to compare expense ratios across funds available to NRIs.

The True Cost of Chasing "Star" Managers

Let's quantify what chasing performance actually costs.

The DALBAR 2025 study found that in 2024, the average equity investor earned just 16.54% while the S\&P 500 returned 25.02%. That 8.48 percentage point gap is the second-largest investor underperformance in a decade.

Why the gap? Investors chase yesterday's winners. They buy high-performing funds after the performance has already happened, then sell when performance dips.

A detailed analysis showed that DALBAR's "Guess Right Ratio" – how often investors time their fund switches correctly – fell to just 25% in 2024. Investors guessed right only one quarter of the time.

Over 20 years, this behavior gap compounds devastatingly. A $100,000 investment in the S\&P 500 left untouched would have grown to $717,503. The average investor, moving between funds trying to pick winners, ended with just $345,614.

That's over $370,000 lost to behavior, not bad markets.

👉 Tip: The biggest threat to your returns isn't picking the wrong fund manager. It's your own behavior – switching funds, chasing performance, and paying higher fees for the privilege.

A Practical Framework for NRIs

Based on the research, here's how to approach fund selection:

Step 1: Filter by expense ratio first

Start with the cheapest options in each category. Morningstar's research shows this is the most reliable predictor of success.

For Indian equity exposure, compare:

• Nifty 50 index funds (expense ratios 0.10-0.20%)
• Active large-cap funds (expense ratios 0.80-2.00%)

The active fund needs to outperform by nearly 1% annually just to match the index fund's net returns.

Step 2: Consider market efficiency

For large-cap Indian stocks, index funds often make sense. These stocks are heavily analyzed, leaving less room for active managers to find mispriced opportunities.

For mid and small-cap exposure, consider lower-cost active funds, as these markets show better active management results historically.

Step 3: Choose direct plans

If investing in Indian mutual funds, always choose direct plans over regular plans. The expense ratio savings compound over time.

Learn more about how NRIs can invest in Indian mutual funds through the proper channels.

Step 4: Stay invested

The DALBAR data shows that fund switching destroys returns. Pick a diversified portfolio, keep costs low, and stay the course.

Use Belong's tools to compare options:

• NRI FD Comparison Tool for fixed income
• GIFT City Mutual Funds Explorer for equity
• Residential Status Calculator for tax planning

What About Fund Manager Tenure and Experience?

Does it help to pick funds with experienced, long-tenured managers?

The evidence is mixed. Trustnet's analysis notes that "a manager with a long history of successfully navigating different market cycles may have a higher likelihood of continuing to deliver strong results."

But the SPIVA Persistence data shows even this doesn't guarantee success. Good managers have bad years. Strategies that worked in one market environment fail in another.

If you insist on considering manager factors, look for:

• Consistent investment philosophy (not style-drifting)
• Reasonable fund size (too large and alpha becomes harder to generate)
• Alignment of interests (manager's own money in the fund)
• Low turnover (reducing transaction costs)

But recognize you're making a bet against long odds. The probability of selecting a manager who will consistently outperform is statistically small.

Tax Considerations for NRIs

When comparing funds, don't forget the tax impact.

For NRIs investing in Indian mutual funds:

• Equity fund taxation: STCG (under 1 year) at 20%, LTCG at 12.5% on gains exceeding Rs 1.25 lakh
• Debt fund taxation: Taxed at slab rates
• TDS is deducted at source for NRI investors

GIFT City investments may offer tax advantages for NRIs from zero-tax jurisdictions like the UAE. Capital gains on GIFT City mutual funds can be tax-free for such NRIs.

DTAA benefits may also reduce your overall tax burden. The UAE-India tax treaty provides relief from double taxation.

A high-fee fund that's tax-inefficient hurts you twice. Consider the total cost of ownership: expense ratio + taxes + behavioral costs.

👉 Tip: For UAE-based NRIs, GIFT City mutual funds can offer both USD denomination and potential tax-free capital gains. Compare the total after-tax return, not just the headline performance.

The Bottom Line: What Actually Predicts Fund Success?

The research is clear:

Expense ratio: The single best predictor of future fund performance. Lower fees = higher probability of success.

Past performance: Nearly useless as a predictor. Top performers don't stay on top. Zero funds maintained top-quartile status over four consecutive years.

Fund manager reputation: Largely irrelevant statistically. 90% of active managers underperform over 15 years regardless of their credentials.

Market efficiency: In highly analyzed markets (U.S. large-cap, Indian large-cap), index funds typically win. In less efficient markets (small-cap, emerging), active management has better odds but still doesn't guarantee success.

For most NRIs, the optimal strategy is straightforward: choose low-cost index funds for core holdings, consider low-cost active funds only for less efficient market segments, avoid chasing past performance, and stay invested for the long term.

The boring approach beats the exciting one. That's what the data shows, year after year.

Ready to invest in low-cost funds designed for NRIs?

Join our WhatsApp community where NRIs discuss fund selection without the sales pitches. Get honest comparisons from fellow investors who've learned these lessons.

Download the Belong app to explore GIFT City mutual funds and USD FDs with transparent expense ratios.

Sources:

• Morningstar - Fund Fees Predict Future Success or Failure: https://www.morningstar.com/funds/fund-fees-predict-future-success-or-failure
• Morningstar 2025 - What Worked for Fund Investors: https://www.morningstar.com/funds/what-worked-fund-investors-pinching-pennies-letting-winners-run
• SPIVA U.S. Scorecard: https://www.spglobal.com/spdji/en/spiva/article/spiva-us/
• SPIVA India Scorecard: https://www.spglobal.com/spdji/en/spiva/article/spiva-india/
• S\&P Persistence Scorecard: https://www.spglobal.com/spdji/en/spiva/article/us-persistence-scorecard/
• Yale School of Management - Past Performance Research: https://insights.som.yale.edu/insights/does-mutual-fund-s-past-performance-predict-its-future
• Morningstar - Persistence in Fund Performance: https://www.morningstar.com/funds/what-short-term-fund-performance-tells-us-about-future-returns
• CNBC - Active Funds Struggle: https://www.cnbc.com/2025/09/05/active-funds-struggle-to-beat-index-funds.html
• SmartAsset - Expense Ratio Impact: https://smartasset.com/data-studies/expense-ratio
• Fidelity - What is an Expense Ratio: https://www.fidelity.com/learning-center/smart-money/expense-ratio
• DALBAR 2025 QAIB Report: https://www.dalbar.com/press-release/investors-missed-the-best-of-2024s-market-gains-latest-dalbar-investor-behavior-report-finds/
• University of Leeds - Past Performance Disclaimer Research: https://business.leeds.ac.uk/faculty/news/article/713/past-performance-disclaimer-does-not-lead-to-good-investment-decisions

Disclaimer: This article is for educational purposes only and should not be considered investment advice. Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully before investing. Past performance is not indicative of future results.