1. Expense ratio pays for running the fund
It covers permitted management and operating expenses and is charged to the scheme rather than appearing like a monthly bill to the investor.
Tip: NAV is calculated after scheme expenses are accounted for.
2. Small annual differences compound
A 0.5% cost difference seems small in one year but can create a meaningful wealth gap over decades because the lost money also stops compounding.
Tip: Cost certainty deserves attention in long-term investing.
3. Lower cost does not make every fund better
A low-cost fund with the wrong asset exposure is not suitable merely because it is cheap. First choose the right strategy, then compare costs among similar options.
Tip: Cheap wrong asset is still wrong.
4. Compare direct and regular plans carefully
Regular plans can include distribution-related costs, while direct plans are bought without that distributor route and generally have lower expense ratios within the same scheme.
Tip: Cost difference is one reason plan type matters.
5. Quick check
Two otherwise identical funds differ by 1% annual cost. Does that matter over 20 years?
Answer: B - Repeated annual cost reduces the amount left to compound.