Expense ratios: small numbers, long horizons
An expense ratio of one and a half percent does not sound like much. On a one lakh investment, it is fifteen hundred rupees a year. That barely registers.
But compounding works on the expense ratio just as it works on your returns — silently, relentlessly, over decades.
Consider two funds with identical gross returns of twelve percent. One charges an expense ratio of 0.5 percent (a low-cost index fund). The other charges 1.8 percent (an actively managed fund). After expenses, Fund A gives you 11.5 percent net. Fund B gives you 10.2 percent net. The difference is 1.3 percent per year.
On a monthly SIP of ten thousand rupees over twenty-five years, that 1.3 percent difference in net return results in a corpus difference of roughly twenty-five to thirty lakhs. Same SIP. Same market. Different expense ratio. The expensive fund needs to consistently beat the cheap fund by 1.3 percent per year — net of all costs — just to match the outcome. Very few actively managed funds sustain that margin over twenty-five years.
This is not an argument for index funds in all cases. There are excellent actively managed funds that justify their higher expense ratio through genuine alpha generation. But it is an argument for knowing what you pay and asking whether the fee is earning its keep.
During reviews at Dhansanchay, we look at expense ratios as part of the overall cost picture — alongside transaction costs, exit loads, and the tax impact of any changes. The goal is not the cheapest possible portfolio. The goal is the most cost-efficient portfolio for the family's specific needs. Sometimes that means index funds. Sometimes it means an actively managed fund with a higher ratio but a demonstrated long-term edge. The decision should be deliberate, not default.
We would rather you own less and understand more than the reverse. Use notes like this to ask better questions — not to shortcut diligence. Scheme documents, costs, and your own goals still come first. Written for general education — not as individual investment, tax, or legal advice.