An expense ratio (also called the Total Expense Ratio, or TER) is the yearly fee a mutual fund or ETF charges, expressed as a percentage of the money you have invested. A 1% expense ratio means roughly 1% of your holding is deducted each year to cover management, administration and distribution costs. It is charged quietly out of the fund, not billed to you separately.
Why a small number compounds into a big one
Because the fee is taken every year on your entire balance, it eats into the base that would otherwise keep compounding. Over a long horizon, the gap between a 0.2% index fund and a 1.5% active fund can add up to a meaningful slice of your final corpus, even before considering whether the pricier fund actually delivered more. In India, SEBI caps TERs by fund size and requires direct plans, which strip out distributor commissions and therefore carry lower expense ratios than regular plans.