The expense ratio is the yearly fee a mutual fund charges to cover the cost of running itself — things like paying the fund manager, research teams, administration, and marketing. It is expressed as a percentage of your total investment and is deducted automatically from the fund's returns, so you never receive a separate bill for it. For example, an expense ratio of 1% means ₹1,000 is deducted every year for every ₹1,00,000 you have invested.
Even a small-looking difference in expense ratio can add up significantly over many years because of compounding — a fund charging 1.5% instead of 0.5% eats into your long-term returns more than it appears at first glance. This is one reason many investors prefer Direct Plans, which typically carry a lower expense ratio than Regular Plans bought through a distributor. When comparing similar funds, a lower expense ratio is generally an advantage, all else being equal.