This Mutual Fund Number Looks Small But Could Ruin Your Retirement Returns

A small change in mutual fund fees could significantly boost your retirement savings, says chartered accountant and educator Meenal Goel, who highlights how even a 0.2 percent difference in expense ratio can add up to Rs 2 lakh over time.

"Lower expense ratios are quietly powerful," Goel shared on LinkedIn, explaining that the seemingly minor annual fee can erode long-term gains because it compounds just like returns. "What if a tiny 0.2 percent fee could add Rs 2 lakh to your retirement corpus?" she asks.

The expense ratio is the annual cost of managing a mutual fund, expressed as a percentage of assets. In India, the average equity mutual fund carries an expense ratio of around 1.5 percent. A 1 percent fee on a Rs 10 lakh investment means paying Rs 10,000 in fees each year.

Goel cites data from the Association of Mutual Funds in India showing that mutual funds in the lowest expense ratio quartile outperformed those in the highest quartile by around 1.2 percentage points annually over a ten-year period.

That difference, she notes, becomes substantial over time. A 0.5 percent cut in expense ratio can increase a Rs 10 lakh SIP's final corpus by roughly Rs 2 lakh over 20 years, solely due to reduced compounding costs.

Passive index funds, which track benchmarks like the Nifty or Sensex, typically offer much lower expense ratios, often under 0.2 percent. These funds are often overlooked in favor of actively managed schemes with higher fees.

Goel encourages investors to look beyond past performance when choosing a fund and to evaluate the cost of investing as closely as the returns.

"Fees compound too," she notes. "And over decades, they matter more than you think."