Expense Ratio is a measure of total cost you pay to a mutual fund for managing your funds. It includes all expenses like marketing and distribution expenses, fund manager’s fees, legal and administrative costs. It is calculated as a percentage of daily investment value.

For example, if a funds expense ratio is 1% and you investment in the fund is Rs 2,00,000 on a particular day, the total expense you pay on your investment value is:

(1% of 2,00,000)/365 = 5.4 Rs

It means your expense is Rs 5.4 on that particular day.

It is calculated as Total Expenses divided by Average AUM of the fund.

Larger the size of a fund, lower is the expense ratio due to scale and vice versa. SEBI has specified limits on maximum expense ratios for various categories of funds and AUM size.